Cryptocurrency as an Investment Instrument in a Modern Financial Market

Abstract

This paper considers the development of attractive strategies featuring cryptocurrency assets, considering their costs and potential risks. The object of analysis in this paper is cryptocurrency as an investment instrument. The main hypothesis of the research is that modern portfolio theory can be applied to cryptocurrency investments to design an investment portfolio with appropriate risk and profitability characteristics. The authors of the paper: (i) place cryptocurrencies in the context of modern financial market and financial technology development; (ii) develop assessment criteria for determining attractiveness of individual cryptocurrencies; and (iii) develop recommendations for creating an optimal cryptocurrency investment portfolio. In order to test the hypothesis, the authors performed calculations and used such methods of scientific research as the collection and processing historical values for cryptocurrency rates from July 2017 to January 2018, as well as data analysis for correlation, covariance, and return on investment. It is shown that a cryptocurrency investment portfolio should be created considering investor objectives and should obey a logical relationship between risk and profitability. Therefore, cryptocurrencies should not be correlated; an investment portfolio should be sufficiently diversified to minimize risk; cryptocurrencies should be liquid, that is freely exchangeable to a fiat currency on an appropriate exchange (e.g. dollars, euros). Investors should also consider regular rebalancing of the portfolio, which could help increase its profitability.

Pairs trading in cryptocurrency market: A long-short story

“…Modern portfolio theory tracing back to Markowitz (1952) suggests that investors can potentially maximize returns while even minimizing risks through selecting complementary assets with low price correlations. Later the findings of many studies that include Bernoulli (1954), Joyce and Vogel (1970), Markowitz (1999), Rubenstein (2002), and Saji (2014) lend support to the validity of Markowitz (1952). Financial assets like stocks show very close correlations during significant volatility, and their relations appear to be low under normal market conditions (Cao et al, 2013).…”

“…However, Corbet et al (2018) made some interesting reviews on the role of cryptocurrencies as a credible investment asset class and as a valuable and legitimate payment system. As the value of cryptocurrencies is measured in terms of fiat currency, which fluctuates widely in markets, one should view cryptocurrencies more like investment assets than money itself (Saksonova & Kuzmina-Merlino, 2019). Indeed, the volatile behavior of the prices of cryptocurrencies makes them more a purely speculative asset than a new type of money (Glaser et al, 2014;Baur et al, 2018).…”

SMEs' Digital Transformation Facilitated by COVID-19

“…It has been shown that embracing digital capabilities and orientation to improve service delivery and customer integration increases the value of the products and services they offer, while increasing the long-term profitability [27][28][29]. In addition, scientists noted the positive impact of digitalization on revenue growth, cost reduction, financial performance, and sustainability [56][57][58][59]. Digital transformation increasingly requires SMEs to strive to achieve environmental sustainability goals [56].…”

Kripto Paraların Yatırım Amaçlı Kullanımı: Riskler ve Getiriler

“…Weiyi Liu, 2018 yılında Finance Research Letters dergisinde yayınlanan "Portfolio Diversification Across Cryptocurrencies" adlı çalışmada (Liu, 2018) (Saksonova & Kuzmina-Merlino, 2019). "The Impact of Cryptocurrency on the Efficient Frontier of Emerging Markets" adlı çalışmada ise, Bitcoin içeren portföylerin etkin sınır içerisinde yer aldığı gözlemlenmiştir.…”