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Designing Factor-Investing Models for Cryptocurrency Assets

Shoara, Mohammad Hossein | 2025

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  1. Type of Document: M.Sc. Thesis
  2. Language: Farsi
  3. Document No: 58623 (44)
  4. University: Sharif University of Technology
  5. Department: Management and Economics
  6. Advisor(s): Zamani, Shiva
  7. Abstract:
  8. This study investigates investment strategies in the cryptocurrency domain by adapting the robust framework of factor investing _traditionally applied in equity markets_ to the specific characteristics of crypto-assets. In this regard, 111 major cryptocurrencies were analyzed over the period from January 2021 to December 2024. To determine the number of relevant factors, the Principal Component Analysis (PCA) method was employed, which suggested a single-factor model for the tested asset portfolio. To evaluate the predictive power of factors such as market, size, value, momentum, trading volume, as well as a derivative-based benchmark factor, statistical techniques including the t-test and portfolio regressions were applied. The statistical results highlighted the predictive significance of the size factor, measured by market capitalization. This factor was constructed from the return spread between small-cap and large-cap cryptocurrencies within the portfolio. Subsequently, an investment strategy based on the optimized single-factor size model was developed. The designed strategy operates as follows: at the end of each Sunday, the portfolio cryptocurrencies are ranked by market capitalization; a long position is taken in the bottom 10% (smallest market capitalization), while a short position is opened in the top 30% (largest market capitalization). In backtesting, this strategy demonstrated a higher annual return compared to both the three-factor model of Liu et al. (2022) and a passive equally weighted portfolio (benchmark)
  9. Keywords:
  10. Cryptocurrency ; Factor-Investing Model ; Portfolio Strategy ; Size Factor ; Investment Strategy

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