Analysis of diversification benefits for cryptocurrency portfolios before and during the COVID-19 pandemic

Abstract

Purpose

This study aims to investigate the diversification benefits attached to the crypto portfolios when combined with stocks, Forex instruments and commodity assets.

Design/methodology/approach

Markowitz diversification techniques have been used to analyze the risk-return tradeoffs of the individual portfolios. Daily prices on cryptocurrencies and the selected asset classes, cover the period before and during the pandemic COVID-19. The portfolio risk of the portfolios was calculated by identical techniques and analyzed with equal criteria.

Findings

The results with 270 trails indicate that stocks on average reduce the portfolio risk of crypto portfolios by 36% followed by fiat currency with 30.9% and commodities by 20.8%. Average daily returns stand in line with the standard portfolio theories where riskier portfolios offer higher returns and the other way around.

Originality/value

The authors contribute to the current literature by investigating the portfolio risk attached to the crypto portfolios when stocks, commodities and Forex instruments were added separately. To this end, results inform not only retail investors but also portfolio managers on the asset classes that generate better optimization for crypto portfolios.

Citation

Aliu, F., Bajra, U. and Preniqi, N. (2022), "Analysis of diversification benefits for cryptocurrency portfolios before and during the COVID-19 pandemic", Studies in Economics and Finance, Vol. 39 No. 3, pp. 444-457. https://doi.org/10.1108/SEF-05-2021-0190