Digital assets (cryptocurrencies): part of a multi-asset portfolio

Pankaj Agrrawal and Doug Waggle

Chapter 8 in Understanding Investment Risk and Return, 2025, pp 166-194 from Edward Elgar Publishing

Abstract: This chapter explores the integration of digital assets (DAs), specifically cryptocurrencies, into traditional multi-asset class (MAC) portfolios, creating a DA-MAC framework. Well-constructed DA-MAC portfolios can offer significant diversification benefits and improved total returns compared to conventional MAC portfolios with equities, bonds, commodities, and real estate. However, due to their higher volatility, DAs should be limited to smaller proportions for most investor portfolios. The chapter applies established portfolio construction methodologies to incorporate cryptocurrencies, addressing market efficiency and price discovery issues. Empirical data supports the diversification benefits of DA-MAC portfolios, showing reduced cross-asset correlations and an upward shift in the efficient frontier. While DA-MAC portfolios present interesting opportunities, the role of cryptocurrencies in investment strategies remains a topic of ongoing discussion due to their volatility and regulatory concerns. The US government's recent approval of DA Exchange Traded Funds (ETFs) marks a significant milestone in their integration into mainstream finance and the asset allocation process.

Keywords: Portfolio construction; Asset allocation; Digital assets; Cryptocurrencies; Digital currency; Portfolio construction methodologies (search for similar items in EconPapers)
Date: 2025
ISBN: 9781035339716
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