Portfolio Diversification using Cryptocurrency

Abstract

This paper aims to find the effectiveness of Cryptocurrency on well-formed portfolio with assets like Commodities, Exchange Traded Fund (ETFs), Stock assets and currency value of INR. There are several ways to determine the effectiveness in diversification. In this paper we use SOLVER, Modern Portfolio Theory and system of comparing Portfolio with FOREX & Commodity, Portfolio with Stock assets, Portfolio with ETFs, and lastly, combining all the asset classes in a portfolio with cryptocurrency. The portfolios optimized by maximizing the Portfolio return rate, as for other assets indicate a comparatively low performance. Testing the maximized utility for different levels of risk aversion confirms the findings of this empirical study and confers them more robustness. In light of the persistently substantial volatility in cryptocurrency markets, the empirical findings assert that portfolio managers are advised to construct a global minimum variance portfolio. In the absence of sophisticated optimization models, private investors can invest according to the market values of cryptocurrencies.

Keywords: Cryptocurrency, Bitcoin, Ripple, Investment Portfolio, asset class, diversification

JEL Classification: G00, G01, G02, G10, G11, G12, G13, G14, G15, G18, G19