Collective Dynamics, Diversification and Optimal Portfolio Construction for Cryptocurrencies
<p>Normalized leading eigenvalue <math display="inline"><semantics> <mrow> <msub> <mover accent="true"> <mi>λ</mi> <mo>˜</mo> </mover> <mn>1</mn> </msub> <mrow> <mo>(</mo> <mi>t</mi> <mo>)</mo> </mrow> </mrow> </semantics></math> of the cross-correlation matrix as a function of time, for (<b>a</b>) the entire collection of cryptocurrencies and (<b>b</b>) the ten deciles. Like the equity market, collective correlations spike during market crises, such as COVID-19, and the collapse of exchanges BitMEX and FTX.</p> "> Figure 2
<p>Uniformity <math display="inline"><semantics> <mrow> <mi>h</mi> <mo>(</mo> <mi>t</mi> <mo>)</mo> </mrow> </semantics></math> of the leading eigenvector <math display="inline"><semantics> <msub> <mi mathvariant="bold">v</mi> <mn>1</mn> </msub> </semantics></math> of the cross-correlation matrix as a function of time, for (<b>a</b>) the entire collection of cryptocurrencies and (<b>b</b>) the ten deciles. The results are dramatically different compared to the equity market, with numerous deciles exhibiting strikingly low uniformity scores over time.</p> "> Figure 3
<p>Results of hierarchical clustering applied to (<a href="#FD6-entropy-25-00931" class="html-disp-formula">6</a>) between ordered pairs <math display="inline"><semantics> <mrow> <mo>(</mo> <mi>m</mi> <mo>,</mo> <mi>n</mi> <mo>)</mo> </mrow> </semantics></math>. A large majority cluster confirms the finding of <a href="#entropy-25-00931-t002" class="html-table">Table 2</a> that the (4,4) portfolio is closely similar to the full (10,4) portfolio in its diversification benefit over time.</p> ">
Abstract
:1. Introduction
2. Data
3. Collective Dynamics and Uniformity
4. Portfolio Sampling
5. Discussion
6. Conclusions
Author Contributions
Funding
Institutional Review Board Statement
Informed Consent Statement
Data Availability Statement
Conflicts of Interest
References
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Cryptocurrency | Ticker | Decile |
---|---|---|
Bitcoin | BTC | 1 |
Ethereum | ETH | 1 |
Tether | USDT | 1 |
Binance Coin | BNB | 1 |
USD Coin | USDC | 2 |
XRP | XRP | 2 |
Cardano | ADA | 2 |
Polygon | MATIC | 2 |
Dogecoin | DOGE | 3 |
Litecoin | LTC | 3 |
TRON | TRX | 3 |
Wrapped Bitcoin | WBTC | 3 |
Chainlink | LINK | 4 |
Cosmos | ATOM | 4 |
UNUS SED LEO | LEO | 4 |
OKB | OKB | 4 |
Ethereum Classic | ETC | 5 |
Filecoin | FIL | 5 |
Monero | XMR | 5 |
Bitcoin Cash | BCH | 5 |
Stellar | XLM | 6 |
VeChain | VET | 6 |
Crypto.com Coin | CRO | 6 |
Algorand | ALGO | 6 |
Quant | QNT | 7 |
Fantom | FTM | 7 |
Tezos | XTZ | 7 |
Decentraland | MANA | 7 |
EOS | EOS | 8 |
Bitcoin BEP2 | BTCB | 8 |
Theta Network | THETA | 8 |
TrueUSD | TUSD | 8 |
Rocket Pool | RPL | 9 |
Chiliz | CHZ | 9 |
USDP Stablecoin | USDP | 9 |
Huobi Token | HT | 9 |
KuCoin Token | KCS | 10 |
Bitcoin SV | BSV | 10 |
Dash | DASH | 10 |
Zcash | ZEC | 10 |
Number of Cryptocurrencies per Sector | ||||
---|---|---|---|---|
Number of Sectors | 1 | 2 | 3 | 4 |
1 | 1 | 0.759 | 0.668 | 0.645 |
2 | 0.774 | 0.651 | 0.598 | 0.587 |
3 | 0.681 | 0.605 | 0.581 | 0.576 |
4 | 0.641 | 0.587 | 0.572 | 0.565 |
5 | 0.613 | 0.583 | 0.565 | 0.559 |
6 | 0.607 | 0.57 | 0.565 | 0.557 |
7 | 0.593 | 0.565 | 0.559 | 0.555 |
8 | 0.582 | 0.564 | 0.557 | 0.552 |
9 | 0.552 | 0.565 | 0.557 | 0.553 |
10 | 0.581 | 0.560 | 0.554 | 0.552 |
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James, N.; Menzies, M. Collective Dynamics, Diversification and Optimal Portfolio Construction for Cryptocurrencies. Entropy 2023, 25, 931. https://doi.org/10.3390/e25060931
James N, Menzies M. Collective Dynamics, Diversification and Optimal Portfolio Construction for Cryptocurrencies. Entropy. 2023; 25(6):931. https://doi.org/10.3390/e25060931
Chicago/Turabian StyleJames, Nick, and Max Menzies. 2023. "Collective Dynamics, Diversification and Optimal Portfolio Construction for Cryptocurrencies" Entropy 25, no. 6: 931. https://doi.org/10.3390/e25060931
APA StyleJames, N., & Menzies, M. (2023). Collective Dynamics, Diversification and Optimal Portfolio Construction for Cryptocurrencies. Entropy, 25(6), 931. https://doi.org/10.3390/e25060931