Optimal Allocation to Cryptocurrencies in Diversified Portfolios

12 Pages Posted: 23 Sep 2022

See all articles by Artur Sepp

Artur Sepp

Sygnum Bank Asset Management

Date Written: September 12, 2022

Abstract

We apply four quantitative methods for optimal allocation to Bitcoin cryptocurrency within alternative and balanced portfolios based on metrics of 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 in alternative and balanced portfolios. We find that the median of optimisers' average weights is 2.3% and 4.8% for 100% alternatives and for 75%/25% balanced/alternatives portfolios, respectively. We conclude that Bitcoin may provide positive marginal contribution to risk-adjusted performances of optimal 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

Sepp, Artur, Optimal Allocation to Cryptocurrencies in Diversified Portfolios (September 12, 2022). Available at SSRN: https://ssrn.com/abstract=4217841 or http://dx.doi.org/10.2139/ssrn.4217841

Artur Sepp (Contact Author)

Sygnum Bank Asset Management ( email )

Uetlibergstrasse 134a
Zurich, 8045
Switzerland

HOME PAGE: http://artursepp.com

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