Crypto assets: the role of ICO tokens within a well-diversified portfolio

Abstract

This paper re-examines the discussion on blockchain technology, crypto assets and ICOs, providing also evidence that in crypto markets there are currently two classes of assets, namely standalone cryptocurrencies (or ‘coins’) and tokens, which result from an ICO and are intrinsically linked to the performance of the issuing company or venture. While the former have been arguments of various empirical studies regarding their price dynamics and their effect on the variance of a well-diversified portfolio, no such study has been done to analyze listed tokens, which in our sample are over 700 and with a backing of about $17.3Bn from their respective ICOs. Therefore, investors interested in optimizing their portfolios should first assess the diversifier, hedge or safe haven role of tokens vis-à-vis traditional assets, on top of ‘coins’, in order to sensibly use this new asset class. After constructing various indices to represent both the token asset class as a whole and its sub-classes, we model dynamic conditional correlations among all the assets classes in our sample to obtain time-varying correlations for each token-asset pair. We find that tokens are effective diversifiers but not a hedge nor a safe haven asset. We evidence that tokens retain important systematic differences with the two other asset classes to which they are most generally compared to, namely ‘coins’ and equities.