Cryptocurrency: A New Investment Opportunity? An Investigation of the Hedging Capability of Cryptocurrencies and Their Influence on Stock, Bond and Gold Portfolios

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Abstract

We investigate whether cryptocurrencies can be legitimate investments with potential use as a hedging tool. We show that Bitcoin and Litecoin can be useful as a hedge due to negative or zero correlations with other asset classes while Ripple shows traits of a diversifying investment. Due to their high intrinsic volatility, cryptocurrencies will always add variance to a univariate portfolio, hence increasing portfolio risk. This additional risk is rewarded with higher Sharpe ratios for gold and bond portfolios but not for stock portfolios.