A Study on the Market and Movements of Cryptocurrencies

Sammanfattning: There has been much debate among investors on the benefits cryptocurrencies can have for portfolios and how their prices moves in the market. It is not difficult to see that cryptocurrencies are very volatile, yet that does not prevent investors from pouring tons of money in crypto-investments that either generate huge returns or catastrophic losses. One of the main challenges with is cryptocurrenciesis determining how they move with the rest of the market with assets such as stocks. The objective of this thesis was to investigate whether or not crypto provides some diversification benefit and if individual cryptocurrencies move in the same manner with respect to eachother. Of special interest was if there is a relationship between the cryptocurrency market and the stock market. The cryptocurrencies chosen for this project were compared mostly to the stocks in the, very information technology-sector focused, Nasdaq 100 index along with a few other assets. This thesis was written in cooperation with Origin Group AB, an Umeå based startup firm specializing in development of cryptocurrency-related technologies, most notably blockchain. All data used comes from publicly available sources and mostly include prices for cryptocurrencies and stocks from which the daily and weekly returns were calculated. The main methods used for this thesis was four different portfolio strategies with different combinations of assets, Style analysis, and principal component analysis. The portfolio strategies showed some promise with varying tradeoffs between diversification and Sharpe-ratio but the results are a bit questionable due to the short investment period. The principal component analysis showed that the cryptocurrency price data is very noise and the currencies moves pretty much in unison in contrast to the industry sector divided Nasdaq 100, which seem to have a few more distinct directions of movement. The Style-analysis’ inconclusive results show signs of a very noisy dataset and that there may not be a clear linear relationship between conventional asset returns and those of crypto.