Abstract :

Cryptocurrencies are significant improvements in the digital age that have changed the way we think about money. The first cryptocurrency was Bitcoin, introduced in 2009 and was created by Nakamoto. Due to their potential ups and downs, many people now think that cryptocurrencies are appropriate for use as an investment instrument, especially millennials who are attracted to higher-risk investment alternatives. A number of different investing options such as cryptocurrencies, gold, and other conventional assets like equities and bonds have unique characteristics and advantages. It’s essential for investors to understand the similarities and differences between cryptocurrencies and other assets in order to create diversified portfolios.

In this study, the optimum portfolio will be constructed using Bitcoin, Gold, LQ45 Index, and ABF IBI as the representative of Indonesia Bond Index. Mean-Variance Optimization will be used as an asset allocation method, and will be compared to the other methods such as Risk Parity, 60/40 Portfolio, and Equally Weighted to find a better risk-adjusted return. The Sharpe ratio analysis is used to evaluate the portfolio performance resulting from every method. The investment strategy will be simulated to know which strategy will result the best total return in the end of simulation period.

According to risk, return, and the Sharpe ratio, Bitcoin could perform better than gold, LQ45, and ABF IBI. Furthermore, the Mean-Variance Optimization resulted the highest Sharpe ratio compared to the other methods. The optimal weight from the portfolio construction using Mean-Variance Optimization allocated 53% to ABFI index, 40% to Bitcoin, and 7% to gold, which resulted 48.2% portfolio return, 40.44% portfolio risk, and 1077.8% Sharpe ratio. From the investment strategy simulation, the quarterly rebalancing strategy was found to be the best strategy with the total return 223.36%.

---

Keywords :

Cryptocurrency, Investment strategies, mean-variance optimization, Portfolio construction, Sharpe Ratio.

---

References :

1. Li, Y., Jiang, S., Wei, Y., & Wang, S. (2021). Take Bitcoin into your portfolio: a novel ensemble porfolio optimization framewrok for broad commodity assets.
2. Maese, V. A., Avery, A. W., Naftalis, B. A., Wink, S. P., & D, V. Y. (2016). Cryptocurrency: A Primer. Law J.
3. Young, E. &. (2017). Sustainable Investing : The Millennial Investor. Retrieved from Retrieved from http://www.morganstanley.com/ideas/sustainable-investing-performance-potential
4. Kristoufek, L. (2015). What are the main drivers of the Bitcoin pricce? Evidence from wavelet coherence analysis. PLos ONE.
5. Hsu, J., Moore, P., & Arnott, R. D. (2005). Fundamentals of Efficient Indexation: Why Equal Weighting is Inefficient. Journal of Indexes.
6. Clarke, R. G., de Silva, H., & Thorley, S. (2012). Minimum-variance portfolios in the US equity market. Journal of Portfolio Management.
7. Roncalli, T. (2013). Introduction to Risk Parity and Budgeting. Chapman and Hall/CRC
8. Damodaran, A. (2008). What is the riskfree rate? A search for the Basic Building Block.
9. DeMiguel, V., Garlappi, L., & Uppal, R. (2009). Optimal versus naïve diversification: How inefficient is the 1/N portfolio strategy? . Review of Financial Studies.
10. Litterman, R. (2013). Modern Investment Management: An Equilibrium Approach. John Wiley & Sons.
11. Markowitz, H. (1952). Portfolio Selection.