  Cryptocurrencies (CCs) have risen rapidly in market capitalization over the
last years. Despite striking price volatility, their high average returns have
drawn attention to CCs as alternative investment assets for portfolio and risk
management. We investigate the utility gains for different types of investors
when they consider cryptocurrencies as an addition to their portfolio of
traditional assets. We consider risk-averse, return-seeking as well as
diversificationpreferring investors who trade along different allocation
frequencies, namely daily, weekly or monthly. Out-of-sample performance and
diversification benefits are studied for the most popular
portfolio-construction rules, including mean-variance optimization,
risk-parity, and maximum-diversification strategies, as well as combined
strategies. To account for low liquidity in CC markets, we incorporate
liquidity constraints via the LIBRO method. Our results show that CCs can
improve the risk-return profile of portfolios. In particular, a
maximum-diversification strategy (maximizing the Portfolio Diversification
Index, PDI) draws appreciably on CCs, and spanning tests clearly indicate that
CC returns are non-redundant additions to the investment universe. Though our
analysis also shows that illiquidity of CCs potentially reverses the results.
