Optimization and Diversification of Cryptocurrency Portfolios: A Composite Copula-Based Approach

Abstract

This paper focuses on the selection and optimisation of a cryptoasset portfolio, using the K-means clustering algorithm and GARCH C-Vine copula model combined with the differential evolution algorithm. This integrated approach allows the construction of a diversified portfolio of eight cryptocurrencies and determines an optimal allocation strategy making it possible to minimize the conditional value-at-risk of the portfolio and maximise the return. Our results show that stablecoins such as True-USD are negatively correlated to the other cryptoassets in the portfolio and could therefore be a safe haven for crypto-investors during market turmoil. Our findings are in line with previous studies exhibiting stablecoins as potential diversifiers.

Keywords

• multivariate t-copula
• CVaR
• differential evolution algorithm
• K-means clustering
• vine copula
• cryptocurrency