Cryptocurrencies (CCs) have become more interesting for institutional investors’ strategic asset allocation and will be a fixed component of professional portfolios in future. This asset class differs from established assets especially in terms of the severe manifestation of statistical parameters. The question arises whether CCs with similar statistical key figures exist.
On this basis, a core market incorporating CCs with comparable properties enables the implementation of a tracking error approach, according to researchers from the Financial Services department in the Faculty of Business Administration and Economics at Heinrich Heine University Düsseldorf. A prerequisite for this is the segmentation of the CC market into a core and a satellite, the latter comprising the accumulation of the residual CCs remaining in the complement. Using a concrete example, we segment the CC market into these components, based on modern methods from image / pattern recognition.
Whether bitcoin actually represents the hard core of the cryptocurrency market can be answered in a differentiated manner. It turns out that although bitcoin is counted as part of the core, it rather marks the edge of the core affiliation. A dominant role, which appears in other analyses, cannot be confirmed.
The proposed segmentation can be used in portfolio management by institutional investors to track the core market with a few selected CCs in a tracking error approach. In order to increase returns, a higher-level management approach can then be used to build up individual positions in CCs that belong to the satellite, thus implementing a core-satellite portfolio.
The proposed method is not limited to CCs. A suitable market segmentation in other asset classes is conceivable, as well. The advantages of product-based implementation of a topic-centered, combined “core-satellite & tracking-error” strategy in the private or institutional investor segment, is reserved for further studies.