Cryptocurrency and Its Role in Portfolio Diversification

Abstract

Purpose: This study sought to explore cryptocurrency and its role in portfolio diversification. Methodology: The study adopted a desktop research methodology. Desk research refers to secondary data or that which can be collected without fieldwork. Desk research is basically involved in collecting data from existing resources hence it is often considered a low cost technique as compared to field research, as the main cost is involved in executive’s time, telephone charges and directories. Thus, the study relied on already published studies, reports and statistics. This secondary data was easily accessed through the online journals and library. Findings: The findings reveal that there exists a contextual and methodological gap relating to cryptocurrency and its role in portfolio diversification. Preliminary empirical review revealed that incorporating cryptocurrencies into investment portfolios offered promising diversification benefits due to their low correlation with traditional assets, despite their high volatility and regulatory uncertainties. It highlighted the significant risk management challenges posed by cryptocurrencies' extreme price fluctuations and the evolving regulatory landscape. The study emphasized the importance of careful, limited allocation to cryptocurrencies, robust risk management practices, and continuous market monitoring. Ultimately, it suggested that cryptocurrencies could enhance portfolio performance when strategically used alongside traditional diversification methods. Unique Contribution to Theory, Practice and Policy: The Modern Portfolio Theory, Efficient Market Hypothesis and Behavioural Finance Theory may be used to anchor future studies on portfolio diversification. The study recommended a cautious yet strategic inclusion of cryptocurrencies in investment portfolios to enhance diversification, emphasizing the importance of ongoing research, robust risk management, and proactive monitoring due to their high volatility and regulatory uncertainties. It called for clear and consistent regulatory frameworks to protect investors while fostering market growth, and highlighted the need for collaboration between academia, industry, and regulatory bodies to improve financial literacy and market stability. These recommendations aimed to contribute to theoretical, practical, and policy aspects of cryptocurrency investments.