Dr. Kalim Khan

Joint Managing Director, Brains Trust

Prof. Mohd. Osaid Koti

Assistant Professor, Rizvi Institute of Management Studies and Research


This study investigates the role of cryptocurrencies in enhancing the performance of portfolios constructed from traditional asset classes. Using a long sample period covering not only the large value increases but also the dramatic declines during the beginning of 2021, the purpose of this paper is to provide a more complete analysis of the dynamic nature of cryptocurrencies as individual investment opportunities, and as components of optimal portfolios. The mean-variance optimization technique of Merton (1990) is applied to develop the risk and return characteristics of the efficient portfolios, along with the optimal weights of the asset class components in the portfolios. The authors provide evidence that as a single investment, the best cryptocurrency is Ripple, followed by Bitcoin and Litecoin. Furthermore, cryptocurrencies have a useful role in the optimal portfolio construction and in investments, in addition to their original purposes for which they were created. Bitcoin is the best cryptocurrency enhancing the characteristics of the optimal portfolio. Ripple and Litecoin follow in terms of their usefulness in an optimal portfolio as single cryptocurrencies. Including all these cryptocurrencies in a portfolio generates the best (most optimal) results. Contributions of the cryptocurrencies to the optimal portfolio evolve over time. Therefore, the results and conclusions of this study have no guarantee for continuation in an exact manner in the future. However, the increasing popularity and the unique characteristics of cryptocurrencies will assist their future presence in investment portfolios.