PMs should optimize cryptocurrencies by sectoral affiliation, not market cap

When creating a portfolio, investors should consider the dynamics of the income ratio of the portfolio asset selected in order to identify and quantify the taken risk of the investment. This research paper will formally identify and describe the benefits of sectoral cryptocurrency classification portfolio optimization and its performance.

Six optimization targets will be formed: MinVar, MinCVaR, MaxSR, MaxSTARR, MaxUT and MaxMean. The formed portfolio is compared with the performance of the CRIX index over the same period. The results suggest that five of the six portfolio strategies performed better if they included cryptocurrencies from financial, exchange and business services sectors.

Examining the utility of observing cryptocurrencies through their sectoral affiliation when constructing a portfolio is the primary theme of this paper. The results of the methodological approach are contributing to considering investment opportunities in the cryptocurrency market. The methodology for exploring the benefits of sectoral allocation and portfolio construction has been implemented in two phases.

In the first phase, the performance of the portfolio limited in composition to market capitalization is created and interpreted. In the second phase the cryptocurrencies of the three leading sectors by market capitalization are included: finance, exchanges and business services. Consideration of the cryptocurrency market by sectoral affiliation is justified by the theoretical assumption that there are significant price trends of certain sectors in the cryptocurrency market.

Such an approach easily recognizes cryptocurrencies that belong to the same sector and have lower market capitalization (higher price growth potential). The results suggest that portfolios in which 20% of the share is allocated to cryptocurrencies of lower market capitalization are achieving higher values across all implemented performance measures in five of the six optimization strategies created.

It is concluded that it is desirable and necessary to observe the cryptocurrency market through their type or their utility, and such an approach can be achieved by categorizing cryptocurrencies into their sectors. Potential investors, and portfolio managers in particular, should not consider cryptocurrencies by market capitalization.

Cryptocurrencies have characteristics and capabilities that define them according to their nominal purpose. Accordingly, portfolio managers are encouraged to consider cryptocurrencies by their characteristics (the type and purpose they provide) when constructing a portfolio, in order to eliminate their subordinate position and to contribute to portfolio performance in the cryptocurrency market.

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