Cryptocurrency: A New Investment Opportunity? David Lee Kuo Chuen, - PowerPoint PPT Presentation

Cryptocurrency: A New Investment Opportunity? David Lee Kuo Chuen, Li Guo ang Yu Wang Journal of Alternative Investments PRESENTED BY CHERYL WANG YU YU RESEARCH FELLOW SINGAPORE UNIVERSITY OF SOCIAL SCIENCES 1

Cumulative Returns of CRIX and Traditional Asset Class 2

Outline  Cryptocurrency  Diversification Effects of Cryptocurrencies  Investor Sentiment and Portfolio 3

From Centralization to Decentralization • High Transaction Fees Fiat • Long Settlement Period Money • Loyalty points of companies or digital coins of Internet-based platforms Centralized • Centralized: Controlled and verified by the Digital institution or legal entities Currency • 1 st cryptocurrency: eCash in 1990s • Double-spending problem Crypto- • Bitcoin and blockchain currency • Altcoins 4

Bitcoin and Altcoins cryptocurrencies and crypto-tokens were launched and traded Total market cap: have market cap larger than $1B 24h trading volume exceeds have market cap larger than $10B Source: https://coinmarketcap.com/ 5

Bitcoin and Altcoins Rank Name Market Cap Price 1 Bitcoin $289.7B $17260.1 2 Ripple $120.3B $3.1 3 Ethereum $99.5B $1028.3 4 Bitcoin Cash $42.9B $2537.3 5 Cardano $26.5B $1.0 6 Litecoin $15.7B $286.7 7 NEM $14.6B $1.6 8 Stellar $12.5B $0.7 9 TRON $11.5B $0.2 10 IOTA $10.8B $3.9 Source: https://coinmarketcap.com/ 6

Data  CRIX index: Tribson and Hardle (2016)  Cryptocurrencies: Research Team (Hu-berlin University, Singapore Management University, CoinGecko)  Traditional asset class: Bloomberg  Sample period: 11 August 2014 – 27 March 2017 7

Cryptocurrencies in the Study Times Being Included in  The top 10 Number Cryptocurrency Symbol CRIX cryptocurrenci 1 Bitcoin BTC 32 es based on 2 Ethereum XRP 32 the frequency with which 3 Litecoin LTC 31 they are 4 Dash DASH 29 included in 5 Dogecoin DOGE 28 the CRIX 6 Monero XMR 26 (CRypto IndeX 7 Bitshares BTC 26 http://crix.hu- 8 MaidSafeCoin MAID 25 berlin.de/) 9 Nxt NXT 24 10 Bytecoin BCN 24 8

Summary Statistics 9

Correlation Analysis  Static Correlation  Dynamic Conditional Correlation (DCC) 10

Efficient Frontier and Transition Map (%) 11

Efficient Frontier and Optimal Portfolio % 12

Sentiment Analysis I  Investor Sentiment (Berkman et al. [2012])  Sentiment-induced overnight returns are reversed during the trading day because rational investors will come into the market to correct the mispricing  Reversal effect: retail investors will pay attention to those cryptocurrencies with extreme past returns – they will simply buy (sell) those cryptocurrencies with high (low) past returns, driving price to deviate from rational expectation. And then a strong return reversal will be observed in the next trading day. 13

Sentiment Analysis II  Sentiment Proxy: Average return in the past 10 trading days as the proxy of investor sentiment for each cryptocurrency  Top 100 cryptocurrencies that have been included in CRIX  Whole sample period (11 August 2014 – 27 March 2017) 14

Sentiment Effect 15

Sentiment Portfolio Performance I 16

Sentiment Portfolio Performance II 17

Sentiment Portfolio Performance III 18

Sentiment Portfolio Performance IV Mean Sharpe Information Maximum Volatility Return Ratio Ratio Drawdown S&P 500 0.0003 0.0084 0.0354 -4.02% Sentiment Portfolio 0.0234 0.0382 0.6106 0.5929 -15.59% Equal-Weight Portfolio 5.96E-05 0.0287 0.0021 0.0141 -17.89% CRIX 0.0008 0.0316 0.0268 0.0274 -22.64% Gold 0.0001 0.0090 0.0109 -0.0158 -3.38% Oil -0.0006 0.0258 -0.0239 -0.0336 -10.79% GSCI Index -0.0005 0.0139 -0.0325 -0.0484 -6.59% REITs 0.0002 0.0098 0.0189 -0.0144 -4.86% PE 0.0001 0.0087 0.0093 -0.0338 -5.00% BTC 0.0008 0.0390 0.0213 0.0134 -25.18% XRP 0.0008 0.0516 0.0157 0.0098 -19.58% DASH 0.0039 0.0796 0.0491 0.0451 -86.35% MAID 0.0026 0.0768 0.0333 0.0295 -37.40% DOGE 0.0008 0.0589 0.0130 0.0078 -27.52% XMR 0.0032 0.0840 0.0381 0.0344 -33.63% BTS -0.0007 0.0733 -0.0099 -0.0138 -29.33% BCN 0.0040 0.1214 0.0329 0.0303 -49.00% NXT -0.0017 0.0725 -0.0234 -0.0271 -36.36% LTC -0.0008 0.0578 -0.0130 -0.0180 -54.72% 19

Robustness Check I: Transaction Cost Whole Sample Period Before 2016 After 2016 Trading Raw Raw Raw Cost Annualized Annualized Annualized (bps) Return t-value Return t-value Return t-value 1 11.58 15.97 13.76 11.77 9.22 11.38 2 11.54 15.91 13.72 11.73 9.18 11.33 3 11.50 15.86 13.68 11.70 9.14 11.29 4 11.46 15.81 13.64 11.67 9.10 11.24 5 11.42 15.76 13.60 11.63 9.06 11.19 6 11.38 15.71 13.56 11.60 9.03 11.15 7 11.34 15.65 13.52 11.57 8.99 11.10 8 11.30 15.60 13.48 11.53 8.95 11.06 9 11.26 15.55 13.44 11.50 8.91 11.01 10 11.22 15.50 13.39 11.47 8.87 10.96 20

Robustness Check II: Sentiment Formation Period Whole Sample Period Before 2016 After 2016 Formation Raw Raw Raw Period Annualized Annualized Annualized (day) Return t-value Return t-value Return t-value 11 11.53 16.00 13.57 16.00 9.28 16.00 12 11.62 16.95 13.66 16.95 9.33 16.95 13 11.27 16.14 13.73 16.14 8.42 16.14 14 11.21 15.53 14.25 15.53 7.58 15.53 15 11.53 15.64 14.42 15.64 7.93 15.64 16 12.01 16.52 14.77 16.52 8.44 16.52 17 11.60 15.42 14.41 15.42 7.80 15.42 18 11.44 15.08 13.91 15.08 7.93 15.08 19 11.21 15.00 13.59 15.00 7.62 15.00 20 11.22 14.99 13.32 14.99 7.87 14.99 21

Conclusion  Cryptocurrency: A New Investment Opportunity! 22