A recent pre-print research paper, entitled “Collective dynamics, diversification and optimal portfolio construction for cryptocurrencies,” has been published by two computer science researchers, Nick James from the University of Melbourne’s Centre for Data Science, and Max Menzies, from the Beijing Institute of Mathematical Sciences and Applications, affiliated with Tsinghua University. The paper examines the role of cryptocurrency in portfolio diversity and how it compares to the traditional equities market. The researchers used a study approach called collective dynamics, with a focus on measuring interactions between groups of data called hierarchical clustering. Their findings show that, although there are differences between the two markets, cryptocurrency is beginning to demonstrate a level of maturity similar to the traditional equities market. The study authors note that cryptocurrency may even offer a lower complexity threshold for diversification. However, the researchers also highlighted some of the issues with cryptocurrency, such as opaque underlying business functions, and called for the development of better understood and widely disseminated cryptocurrency investment principles.
“Retail investors with limited ability to hold complex portfolios of many cryptocurrencies may be sufficiently diversified with a relatively small portfolio across just 16 cryptocurrencies.”
According to the researchers, evidence of “the existence of a ‘best value’ cryptocurrency portfolio” was also found. The study concludes that although cryptocurrency is showing signs of maturity, it has not yet reached the same level as the equities market.
Related: What’s next for EU’s crypto industry as European Parliament passes MiCA?
Collective dynamics, diversification and optimal portfolio construction for cryptocurrencies.
James, Menzies: pic.twitter.com/gnN2PVnx2l
— arXiv art (@arXiv_art) April 19, 2023