University of Twente Student Theses
Diversifying Your Portfolio with Cryptocurrency - Does It Improve Sharpe Ratios for Institutional Investors?
Čiumakovas, Ignas (2022) Diversifying Your Portfolio with Cryptocurrency - Does It Improve Sharpe Ratios for Institutional Investors?
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| Abstract: | Although cryptocurrency has been known to yield enormous returns, institutional investors are still not so confident about directly investing into cryptocurrency assets due to volatility and other risks that come with it. This paper considers whether cryptocurrency has a place in an already well-diversified portfolio of an institutional investor, mainly consisting of traditional assets such as stocks, bonds, and commodities. Results suggest Bitcoin, Ethereum, Binance Coin, Cardano and even a portfolio of cryptocurrencies as possible diversification options in terms of the risk-return tradeoff. Despite the fact that acquisition of cryptocurrency considerably increases total portfolio volatility, the significantly increased returns more than make up for it, as indicated by increased Sharpe ratios. In support of previous literature, it was observed that cryptocurrencies have low to no correlation to traditional assets suggesting cryptocurrency as a potential hedge to traditional market downturns. In addition, it was observed that there is not enough evidence to suggest that the acquisition of Bitcoin leads to significantly increased portfolio returns, implying that Bitcoin should not be the only cryptocurrency considered. A suggestion was made that investing in multiple cryptocurrencies might be the most viable option as this way the investor gets the best of both worlds – significantly higher returns and lower volatility. |
| Item Type: | Essay (Bachelor) |
| Faculty: | BMS: Behavioural, Management and Social Sciences |
| Subject: | 85 business administration, organizational science |
| Programme: | International Business Administration BSc (50952) |
| Link to this item: | https://purl.utwente.nl/essays/90921 |
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