Investing in cryptocurrencies : a study about the risks and rewards

Abstract

The objective of the dissertation is to analyse, within the framework of risks and rewards, whether adding cryptocurrencies to a traditional asset portfolio could lead an investor to gain from diversification benefits and earn a reasonable expected return.

In view of the above, interviews were carried out with professionals in the financial sector and others who are knowledgeable in the subject matter of cryptocurrencies. Furthermore, to achieve the objective of this research, Markowitz’s Portfolio theory was applied. The traditional asset port-folio consists of equities, bonds and commodities, where each asset class consists of an index or tracks an index of the respective asset class. A cryptocurrency portfolio was also formed, where the researcher constructed an equally weighted portfolio made up of five cryptocurrencies.

Results showed that cryptocurrencies are risky compared to other traditional assets, and as a result it is not recommended to risk averse or saving investors, but rather to risk aggressive or institutional investors. Nevertheless, to have a similar maximum amount of risk that a portfolio without cryptocurrencies has, results showed that one should not allocate more than 16% of his portfolio in cryptocurrencies. The researcher concluded that risk averse or saving investors should consider cryptocurrencies as a new category of investment class, should the market be regulated.