Abstract
In this study, we propose three portfolio strategies: allocation based on the normality
assumption, the skewed-Student t distribution, and the entropy pooling (EP) method for 14 smalland
large-capitalization (cap) cryptocurrencies. We categorize our portfolios into three groups:
portfolio 1, consisting of three large-cap cryptocurrencies and four small-cap cryptocurrencies from
various K-means classification clusters; and portfolios 2 and 3, consisting of seven small-cap and
seven large-cap cryptocurrencies, respectively. Then, we investigate the performance of the proposed
strategies on these portfolios by performing a backtest during a crypto market crash. Our backtesting
covers April 2022 to October 2022, when many cryptocurrencies experienced significant losses. Our
results indicate that the wealth progression under the normality assumption exceeds that of the
other two strategies, though they all exhibit losses in terms of final wealth. In addition, we found
that portfolio 3 is the best-performing portfolio in terms of wealth progression and performance
measures, followed by portfolios 1 and 2, respectively. Hence, our results suggest that investors
will benefit from investing in a portfolio consisting of large-cap cryptocurrencies. In other words, it
may be safer to invest in large-cap cryptocurrencies than in small-cap cryptocurrencies. Moreover,
our results indicate that adding large- and small-cap cryptocurrencies to a portfolio could improve
the diversification benefit and risk-adjusted returns. Therefore, while cryptocurrencies may offer
potentially high returns and diversification benefits in a portfolio, investors should be aware of the
risks and carefully consider their investment objectives and risk tolerance before investing in them.