Optimal Allocation to Cryptocurrencies in Diversified Portfolios
Risk Magazine, October 2023, 1-6
11 Pages Posted: 23 Sep 2022 Last revised: 30 Nov 2023
Date Written: December 31, 2022
We apply four quantitative methods for optimal allocation to Bitcoin and Ether cryptocurrencies within alternative and balanced portfolios including metrics for portfolio diversification, expected risk-returns, and skewness of returns distribution. Using roll-forward historical simulations, we show that all four allocation methods produce a persistent positive allocation to Bitcoin and Ether in alternative and balanced portfolios with a median allocation of about 2.7%. We conclude that core cryptocurrencies may provide positive contribution to risk-adjusted performances of broad investment portfolios. We emphasize the diversification benefits of cryptocurrencies as an asset class within broad risk-managed portfolios with systematic re-balancing.
Keywords: Optimal Asset Allocation, Bitcoin, Cryptocurrency
JEL Classification: G10, G11, G12
Suggested Citation: Suggested Citation