The green, the dirty and the stable: Diversifying equity portfolios by adding tokens of different nature

In this study we propose to empirically assess the potential diversification benefits of three types of cryptocurrencies (traditional: Bitcoin, green: Cardano and stablecoins: Tether) by including them in equity-based asset allocation strategies. We build monthly rebalanced minimum VaR portfolios based on different wavelet scales or investment horizons. We use the ADCC-GARCH model to fit the dynamic dependence structure. We find that traditional and green cryptocurrencies provide diversification opportunities when considering portfolio strategies based on short-term investment horizons. We also demonstrate that stablecoins may play the role of safe haven assets for those portfolio strategies based on long-term investment horizons.

Automated summary

This study empirically assesses the diversification benefits of different types of cryptocurrencies by including them in asset allocation strategies. The results show that traditional and green cryptocurrencies offer diversification opportunities for short-term investment horizons, while stablecoins can serve as safe haven assets for long-term investment horizons.