Unlocking the Diversification Potential of Bitcoin Forks in Crypto Portfolios

Abstract

Bitcoin forks have emerged as alternatives to mitigate Bitcoin's limitations or enhance its capabilities. Despite their common origin, there is a paucity of scholarly research investigating whether these forks facilitate diversification within cryptocurrency portfolios. This study evaluates the diversification potential of Bitcoin forks by scrutinizing their volatility and interrelationships with Bitcoin and among themselves. Employing a quantitative methodology, historical price data for Bitcoin and its ten forks from April 2020 to November 2024, obtained from CoinMarketCap.com, were analyzed. Advanced statistical methods, including Pearson correlation, Maximum Information Coefficient (MIC), Bayesian Information Criterion (BIC), and cluster analysis, were utilized to evaluate relationships and diversification advantages. The data reveal that most Bitcoin forks closely mimic Bitcoin’s price patterns, demonstrating substantial positive correlations. However, certain forks, such as Bitcoin Gold, demonstrate unique patterns and reduced correlations, indicating possibilities for diversification. Certain forks offer special risk-adjusted return opportunities during times of high market volatility. Finding Bitcoin forks with distinctive characteristics can improve portfolio diversification, even though they typically mirror the price movements of the cryptocurrency. Analysis of these assets can help investors optimize risk-adjusted returns, particularly in volatile markets, highlighting the importance of strategic asset selection for a diversified cryptocurrency portfolio.