Cryptocurrency and Its Role in Portfolio Diversification
DOI:
https://doi.org/10.47941/ijf.2115Keywords:
Cryptocurrency, Portfolio Diversification, Risk Management, Regulatory Frameworks, Financial LiteracyAbstract
Purpose: This study sought to explore cryptocurrency and its role in portfolio diversification.
Methodology: The study adopted a desktop research methodology. Desk research refers to secondary data or that which can be collected without fieldwork. Desk research is basically involved in collecting data from existing resources hence it is often considered a low cost technique as compared to field research, as the main cost is involved in executive’s time, telephone charges and directories. Thus, the study relied on already published studies, reports and statistics. This secondary data was easily accessed through the online journals and library.
Findings: The findings reveal that there exists a contextual and methodological gap relating to cryptocurrency and its role in portfolio diversification. Preliminary empirical review revealed that incorporating cryptocurrencies into investment portfolios offered promising diversification benefits due to their low correlation with traditional assets, despite their high volatility and regulatory uncertainties. It highlighted the significant risk management challenges posed by cryptocurrencies' extreme price fluctuations and the evolving regulatory landscape. The study emphasized the importance of careful, limited allocation to cryptocurrencies, robust risk management practices, and continuous market monitoring. Ultimately, it suggested that cryptocurrencies could enhance portfolio performance when strategically used alongside traditional diversification methods.
Unique Contribution to Theory, Practice and Policy: The Modern Portfolio Theory, Efficient Market Hypothesis and Behavioural Finance Theory may be used to anchor future studies on portfolio diversification. The study recommended a cautious yet strategic inclusion of cryptocurrencies in investment portfolios to enhance diversification, emphasizing the importance of ongoing research, robust risk management, and proactive monitoring due to their high volatility and regulatory uncertainties. It called for clear and consistent regulatory frameworks to protect investors while fostering market growth, and highlighted the need for collaboration between academia, industry, and regulatory bodies to improve financial literacy and market stability. These recommendations aimed to contribute to theoretical, practical, and policy aspects of cryptocurrency investments.
Downloads
References
Bailey, W., & Ng, L. K. (2018). International Diversification: Still Not Benefiting Enough from Foreign Markets. Journal of Portfolio Management, 44(3), 43-57. https://doi.org/10.3905/jpm.2018.44.3.043
Bianchi, R. J., & Drew, M. E. (2021). Cryptocurrencies as an Asset Class: An Empirical Assessment. Journal of Investment Management, 19(3), 1-19. https://doi.org/10.3905/jim.2021.19.3.001
Brière, M., Oosterlinck, K., & Szafarz, A. (2015). Virtual Currency, Tangible Return: Portfolio Diversification with Bitcoin. Journal of Asset Management, 16(6), 365-373. https://doi.org/10.1057/jam.2015.5
Buterin, V. (2014). A Next-Generation Smart Contract and Decentralized Application Platform. Ethereum White Paper. Retrieved from https://ethereum.org/en/whitepaper/
Cheah, E.-T., & Fry, J. (2015). Speculative bubbles in Bitcoin markets? An empirical investigation into the fundamental value of Bitcoin. Economics Letters, 130, 32-36. https://doi.org/10.1016/j.econlet.2015.02.029
Corbet, S., Meegan, A., Larkin, C., Lucey, B., & Yarovaya, L. (2018). Exploring the Dynamic Relationships between Cryptocurrencies and Other Financial Assets. Economics Letters, 165, 28-34. https://doi.org/10.1016/j.econlet.2018.01.004
Costa, B., & Martins, H. (2017). Portfolio Diversification in Brazil: Historical Context and Recent Trends. Brazilian Journal of Finance, 15(2), 203-219. https://doi.org/10.12660/rbfin.v15n2.2017.65894
Dyhrberg, A. H. (2016). Bitcoin, Gold and the Dollar–A GARCH Volatility Analysis. Finance Research Letters, 16, 85-92. https://doi.org/10.1016/j.frl.2015.10.008
Fama, E. F. (1970). Efficient Capital Markets: A Review of Theory and Empirical Work. Journal of Finance, 25(2), 383-417. https://doi.org/10.2307/2325486
Fidelity Investments. (2020). Institutional Investors Digital Assets Survey. Retrieved from https://www.fidelitydigitalassets.com/bin-public/060_www_fidelity_com/documents/FDAS/2020-Institutional-Investor-Digital-Assets-Survey.pdf
Financial Conduct Authority. (2021). Cryptoassets Consumer Research 2021. Retrieved from https://www.fca.org.uk/publication/research/cryptoassets-consumer-research-2021.pdf
Guesmi, K., Saadi, S., Abid, I., & Ftiti, Z. (2019). Portfolio Diversification with Virtual Currency: Evidence from Bitcoin. International Review of Financial Analysis, 63, 431-437. https://doi.org/10.1016/j.irfa.2018.03.004
Ito, T., & Lin, W. (2020). Japanese Household Finance: New Insights from the 2019 Survey. Journal of the Japanese and International Economies, 58, 101098. https://doi.org/10.1016/j.jjie.2020.101098
Ji, Q., Bouri, E., Lau, C. K. M., & Roubaud, D. (2019). Dynamic Connectedness and Integration in Cryptocurrency Markets. International Review of Financial Analysis, 63, 257-272. https://doi.org/10.1016/j.irfa.2019.01.002
Kahneman, D., & Tversky, A. (1979). Prospect Theory: An Analysis of Decision under Risk. Econometrica, 47(2), 263-291. https://doi.org/10.2307/1914185
Kuroda, K., Chida, K., & Oda, K. (2019). Cryptocurrency Investment Trends in Japan. Journal of the Japanese and International Economies, 53, 101034. https://doi.org/10.1016/j.jjie.2019.101034
Liu, Y., & Tsyvinski, A. (2018). Risks and Returns of Cryptocurrency. The Review of Financial Studies, 32(5), 1-22. https://doi.org/10.1093/rfs/hhy057
Markowitz, H. (1952). Portfolio Selection. Journal of Finance, 7(1), 77-91. https://doi.org/10.2307/2975974
Nakamoto, S. (2008). Bitcoin: A Peer-to-Peer Electronic Cash System. Retrieved from https://bitcoin.org/bitcoin.pdf
Ncube, M., & Ndou, E. (2019). Investment and Diversification Strategies in Africa: Evidence from South Africa. African Development Review, 31(4), 457-469. https://doi.org/10.1111/1467-8268.12437
Souza, J., & Vieira, E. (2020). Cryptocurrency Adoption in Brazil: Motivations and Trends. Brazilian Journal of Finance, 18(3), 257-275. https://doi.org/10.12660/rbfin.v18n3.2020.81098
Statman, M. (2019). The Diversification Puzzle. Financial Analysts Journal, 75(1), 38-52. https://doi.org/10.1080/0015198X.2019.1556307
Trimborn, S., & Härdle, W. K. (2018). CRIX or Evaluating Blockchain-based Currencies. Journal of Empirical Finance, 49, 107-121. https://doi.org/10.1016/j.jempfin.2018.09.004
Downloads
Published
How to Cite
Issue
Section
License
Copyright (c) 2024 Goodwell Okechukwu
This work is licensed under a Creative Commons Attribution 4.0 International License.
Authors retain copyright and grant the journal right of first publication with the work simultaneously licensed under a Creative Commons Attribution (CC-BY) 4.0 License that allows others to share the work with an acknowledgment of the work's authorship and initial publication in this journal.
