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Since its conception, the cryptocurrency market has been frequently describedas an immature market, characterized by significant swings in volatility andoccasionally described as lacking rhyme or reason. There has been greatspeculation as to what role it plays in a diversified portfolio. For instance,is cryptocurrency exposure an inflationary hedge or a speculative investmentthat follows broad market sentiment with amplified beta? We have recentlyexplored similar questions with a clear focus on the equity market. There, ourresearch revealed several noteworthy dynamics such as: an increase in themarket's collective strength and uniformity during crises, greaterdiversification benefits across equity sectors (rather than within them), andthe existence of a "best value" portfolio of equities. In essence, we can nowcontrast any potential signatures of maturity we identify in the cryptocurrencymarket and contrast these with the substantially larger, older and betterestablished equity market. This paper aims to investigate whether thecryptocurrency market has recently exhibited similar mathematical properties asthe equity market. Instead of relying on traditional portfolio theory, which isgrounded in the financial dynamics of equity securities, we adjust ourexperimental focus to capture the presumed behavioral purchasing patterns ofretail cryptocurrency investors. Our focus is on collective dynamics andportfolio diversification in the cryptocurrency market, and examining whetherpreviously established results in the equity market hold in the cryptocurrencymarket, and to what extent. Results reveal nuanced signatures of maturityrelated to the equity market, including the fact that correlations collectivelyspike around exchange collapses, and identify an ideal portfolio size andspread across different groups of cryptocurrencies.

Collective dynamics, diversification and optimal portfolio construction for cryptocurrencies