Crypto portfolio versus FAANG investment portfolio

Abstract

Permanent technological progress leads to the constant creation of financial innovations, one of which is cryptocurrency. This is a new instrument of the world market, which has been actively traded only in recent years. In this regard, a number of questions arise, including the possibility and feasibility of forming an investment portfolio of cryptocurrencies using classical methods of portfolio management. The aim of the research is to identify correlation between main cryptocurrencies in the crypto portfolio and highlight the main differences between standard stock portfolio and crypto one. Historical data from Yahoo Finance was mainly used for the analysis in the period from 2017 to 2021. A quantitative approach was chosen for the research in order to calculate and compare portfolios’ risk and return. Several metrics were used in order to get reliable results, such as Correlation analysis, Variance Covariance matrix, CAPM and Beta. Calculations were supported by secondary data from recent academic researched and articles from trading journals. Collected data helped to build assumptions behind results and answer the research questions about interrelation of the cryptocurrencies and its similarities with traditional portfolio. The empirical findings unexpectedly revealed low correlation between five main cryptocurrencies and its influence on the portfolio return. It also displayed how risky and unstable crypto portfolio could be compared to the FAANG portfolio, that consisted of very consistent companies ‘stocks. It gave understanding of unsystematic risks in the portfolios and how it can be beneficial for different types of investors. The research also showed the interconnection of the cryptocurrencies and S&P500.