The green, the dirty and the stable: Diversifying equity portfolios by adding tokens of different nature

Abstract

In this study we propose to empirically assess the potential diversification benefits of three types of cryptocurrencies (traditional: Bitcoin, green: Cardano and stablecoins: Tether) by including them in equity-based asset allocation strategies. We build monthly rebalanced minimum VaR portfolios based on different wavelet scales or investment horizons. We use the ADCC-GARCH model to fit the dynamic dependence structure. We find that traditional and green cryptocurrencies provide diversification opportunities when considering portfolio strategies based on short-term investment horizons. We also demonstrate that stablecoins may play the role of safe haven assets for those portfolio strategies based on long-term investment horizons.