How to choose the right altcoin for your crypto-folio?

And Minimize Variance

Believe it or not, but the worst performing top-16 cryptocurrency for 2017 (if you were to invest on Jan 1, 2017 and reassess your situation on July 28, 2017) is everyone’s darling, Bitcoin. Over the last ~7 months, the return on Bitcoin stands at 3.3x against an average return of 26.8x for the remaining 15 coins put together* (which ranges between 81.5x for Stratis and 6.0x for Monero). Before the Bitcoin bulls charge at me for trying to dissuade people from investing in Bitcoin, let me make it amply clear that I am a firm believer in the long-term potential of the mother-coin; a fact that is reflected through my crypto-folio, more than 50% of which is made up of Bitcoin.

The toughest decision for me, however, has been to figure out the allocation of the remaining 50% of my capital I have earmarked for cryptocurrencies, particularly from the standpoint of reducing the volatility of my portfolio. I would like to determine the asset classes which move together and only invest in one/two assets from cluster of such assets. Fundamental analysis provides little to no insight into these alternative assets, and proponents of technical analysis are also at a loss when faced with the difficulty of analyzing new currencies with little historical data, irregular variations in volume and the debate around indicators lagging price and volume (there are several articles in favor of /against the two approaches — you can click here, here, here and here to read more).

This left me with the option of either picking a coin/ a few coins randomly or investing in a diversified class of coins, all supported by high average daily trading volumes. I decided to go with the top sixteen coins, by market cap, to avoid any pump and dump targets. I also wanted to minimize variance while maximizing returns and followed the FTSE Global Minimum Variance methodology, whereby I calculated the correlation coefficient between these 16 asset classes. The objective was to determine the correlation between two coins and accordingly cluster the ones that are highly correlated. The following table lists down my findings**.