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.