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Optimization of special cryptocurrency portfolios

Benjamin Schellinger (Faculty of Business, Augsburg University of Applied Sciences, Augsburg, Germany)

Journal of Risk Finance

ISSN: 1526-5943

Article publication date: 12 May 2020

Issue publication date: 19 June 2020




This paper aims to elaborate on the optimization of two particular cryptocurrency portfolios in a mean-variance framework. In general, cryptocurrencies can be classified to as coins and tokens where the first can be thought of as a medium of exchange and the latter accounts for security or utility tokens depending upon its design.


Against this backdrop, this empirical study distinguishes, in particular, between pure coin and token portfolios. Both portfolios are optimized by maximizing the Sharpe ratio and, subsequently, compared with alternative portfolio strategies.


The empirical findings demonstrate that the maximum utility portfolio of coins, with a risk aversion of λ = 10, outweighs alternative frameworks. The portfolios optimized by maximizing the Sharpe ratio for both coins and tokens indicate a rather poor performance. Testing the maximized utility for different levels of risk aversion confirms the findings of this empirical study and confers them more robustness.

Research limitations/implications

Further investigation is strongly recommended as tokens represent a new phenomenon in the cryptocurrency universe, for which only a limited amount of data are available, which restricts the sampling. Furthermore, future study is to include more sophisticated optimization models using different constraints in portfolio creation.

Practical implications

In light of the persistently substantial volatility in cryptocurrency markets, the empirical findings assert that portfolio managers are advised to construct a global minimum variance portfolio. In the absence of sophisticated optimization models, private investors can invest according to the market values of cryptocurrencies. Despite minor differences in the risk and reward ratios of the portfolios tested, tokens tend to be more speculative, especially, if the Tether token is excluded, which may require enhanced supervision and investor protection by regulating authorities.


As the current literature investigates on diversification effects of blended cryptocurrency portfolios rather than making an explicit distinction, this paper reflects one of the first to explore the investability and role of diversifying coins and tokens using a classic Markowitz approach.



This research work was funded by the Deutsche Bundesbank. (There is no specific funding ID number available).

The author would like to express my deep gratitude to Professor Dr Feucht and Professor Dr Horbach for their guidance, enthusiastic encouragement and useful critiques of this research work. Furthermore, the author gratefully thanks the anonymous reviewers for their insightful comments to improve the quality of this paper.


Schellinger, B. (2020), "Optimization of special cryptocurrency portfolios", Journal of Risk Finance, Vol. 21 No. 2, pp. 127-157.



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