Crypto Currencies and Traditional Investment Portfolios. An Empirical Study on the Effects of Adding Crypto Currencies to Traditional Investment Portfolios

Crypto currencies are a new appearance at the intersection between technology and finance. Since finance, and asset management in particular, are relatively entrenched regarding asset classes, it is of particular interest, which impact a new asset class would cause on existing asset allocation models. This work is intended to explore the effect an allocation of crypto currencies would have on traditional investment portfolios. Due to the current low-interest rate environment, combined with the recent COVID-19 pandemic, investors are keen to explore new or alternative investment opportunities. At the same time, crypto currencies are attracting growing attention and are perceived not only as a currency but also as an asset class. Therefore, exploring if an allocation of crypto currencies could provide advantages to interested investors and show a new perspective on traditional asset allocation models.

Philipp Rosenbach completed studies of Business Administration (BSc.) and Finance (MSc.) at the Frankfurt School of Finance and Management. In the course of his studies, the author gained relevant experience within Audit, Private Equity and Investment Banking. Within his employment at the Frankfurt School Blockchain Center he released relevant publications in the areas of Blockchain, Crypto Currencies as well as Asset Allocation.

Textprobe:Kapitel 2.1.2, Norway Model (50/50 and 80/20):The history of the Norway model is based on the Norwegian Government Pension Fund, which was established in 1990. The fund's goal is to invest the yearly surplus generated by the Norwegian petroleum sector to provide for the period when the North Seas' oil reserves run out. With nearly 1.2 trillion USD (SWFI Institute, 2020) assets under management (AUM), the fund is the world's largest sovereign wealth fund. Corresponding to that, the fund owns nearly 1.4% of the globally available free float of stock. If examining the time period, the fund started to invest in shares as well; it achieved a better annual performance than the German DAX-Index with 6.1% over the 5.6% the DAX achieved (Clemens, 2018). Now it should be considered how this extraordinary performance has been achieved. The fund's investment approach is quite remarkable, as it is extremely simple. The fund invests only in a minimum number of different asset classes to achieve the risk-return objectives. Conventional investment classes such as equities, bonds, and cash are filling the bill (Koedijk, 2019). This approach provides certain benefits, including typically low costs and fees, high transparency, and the reduced risk of being scammed by a manager with poor performance.Consequently, a drawback of this strategy is the limitation in the asset allocation. The Norwegian model has been chosen for this paper because it has a very simple investment approach, which should be easily understandable for all readers in the context of the often non-trivial asset allocation topic. It is specified on two asset classes, equities, and bonds. The weighting, used in the scope of this study, of both, will be a portfolio of 50% equities and 50% bonds and a portfolio of 80% equities and 20% bonds. The methodology of the exact calculation and the exact allocation of Bitcoin is described in section 3.1.2.1.3, Balanced Portfolio Model:While the presented Norway model provides a good introduction to the topic of portfolio models, the following allocation strategy aims for a broader coverage of all asset classes. In the Norway model, only an allocation in equities and bonds is considered; here the spectrum is to be expanded to include commodities, real estate and cash. The history of commodity exchange is as old as the history of intelligent people is. Commodity trading as it is known today has other historical roots. The first regulated exchange for commodity trading was the Amsterdam Stock Exchange, probably the first stock exchange of humankind. Early trading included, for that time, sophisticated instruments, such as short sales, forwards contracts and options. Trading took place at the Amsterdam Bourse, an open aired venue, which was created as a commodity exchange in 1530 and rebuilt in 1608 (Stringham, 2003). Today's commodity trading has very few things in common with its historical roots. Nonetheless, commodities are still traded, but they are usually not physically inspected, but only traded from the server rooms in the world's financial centers. Nevertheless, they are still an important asset class. Therefore, with the balanced portfolio, an investment model had been chosen, which also includes commodities. An underlying rationale is that the Norwegian portfolio should be supplemented by three additional asset classes, first to provide a boarder view, and second improve the risk-reward performance. Nonetheless, equities and bonds will still be the most significant asset classes by allocation. This is justified by the fact that these two asset classes each have the largest market capitalization worldwide and must be allocated accordingly. In this paper, an allocation scenario of 40.00 % equities, 30.00 % bonds, 12.50 % commodities, 12.50% real estate, and 5.00 % cash is proposed to take account of the declared model.