Enhancing Portfolio Performance with Crypto Tokens: a Correlation Network Analysis

In this paper, we examine whether crypto tokens can boost portfolio performance and provide direct evidence on the claim that crypto tokens are potentially desirable alternatives for diversification. We use correlation-based networks to study the crypto token market and compare the optimal portfolio composed of tokens with that of tokens and stocks. We find that tokens with high Sharp ratios but low centrality can serve as the booster of portfolio performance. In addition, we discover that the token market resembles the stock market in terms of correlation network structure. The market is dominated by tokens from Defi, blockchain infrastructure, and GameFi sectors, and becomes more correlated during market downturns.