Hello Holders! In this article we will look at the cryptocurrency investment strategies by creating an optimal portfolio using an Efficient Frontier and optimal cryptocurrency weights. Let’s take a look at Modern Portfolio Theory (MPT), which suggests that investors are risk averse. We have two or three portfolios with the same yield, so an investor will choose the one with the lowest risk. In accordance with this, if a portfolio has a high portfolio risk, then the investor will choose the portfolio that assumes a higher return. The theory of building optimal investment portfolios was first proposed by Harry Markowitz. According to Markowitz, any investor should base his choice solely on expected returns and standard deviation when choosing a portfolio. Thus, having carried out an assessment of various combinations of portfolios, he must choose the “best” one, based on the ratio of the expected return and the standard deviation of these portfolios. The ratio of the return-risk portfolio remains normal: the higher the yield, the higher the risk. The main task of the investor is to make a portfolio of assets with weak or negative correlation. Portfolios with a correlation coefficient of 1 would be risky, whereas with -1 less risky, but in practice it is rare. With a large number of assets, the risk is also correspondingly reduced than with two assets, so we diversify the portfolio Efficient Frontier Markowitz put two parameters at the head of his theory – risk and profitability. An efficient frontier is one that defines the effective set of portfolios on it, respectively, between risk and return. Let’s look at an example: Portfolio 1 – low return and low risk Portfolio 2 – high return and high risk Portfolio 3 – effective portfolio Portfolio 4 – not effective portfolio All investment portfolios that are on the border will be effective. With the existing risk, the other portfolio will have lower returns. Therefore, the investor can choose the appropriate risk and select the optimal yield. Thus, the result of MPT using an effective frontier will be the selection of the optimal weights of each asset in the portfolio. Let’s go research cryptocurrency portfolio! So, we decided to take the 12 largest cryptocurrency by capitalization and evaluate 5000 possible portfolio options that can be. This is our cryptocurrency investment strategies With the help of holderlab.io you can find the effective frontier of your portfolio just for free So we take for research: BTC, ETH, XRP, LTC, BCH, EOS, BNB, BSV, TRX, XLM, ADA, XMR as the largest in terms of capitalization. First, let’s look at the profile of the correlation matrix for 1 year from 2018 to 2019 The 1-year correlation is very high. Cryptocurrency Asset Correlation Information: Bitcoin 0,842 Ethereum 0,873 XRP 0,851 Litecoin 0,895 Bitcoin Cash 0,895 EOS 0,861 Binance Coin 0,884 Bitcoin SV 0,797 Cardano 0,834 TRON 0,813 Stellar 0,687 Monero 0,9 We are testing the asset ratio for the last 3 months, starting from April 15 2019 Bitcoin -0,057 Ethereum 0,173 XRP 0,532 Litecoin 0,505 Bitcoin Cash 0,635 EOS 0,493 Binance Coin 0,554 Bitcoin SV 0,565 Cardano 0,561 TRON 0,579 Stellar 0,39 Monero 0,52 The results are already better, Bitcoin has a negative correlation, but this is a fairly short period for analysis using the correlation matrix, however, we will look at the profile of the efficient frontier. Calculation of the efficient frontier of a cryptocurrency portfolio for 2019 So in cryptocurrency investment strategies we analyzed a sample of portfolios from the beginning of 2019, 5000 cryptocurrency portfolios were analyzed. Let’s look at the results: The optimal portfolio distributed weights as follows: Bitcoin 28,86% Ethereum 1,26% XRP 10,23% Litecoin 7,32% Bitcoin Cash 3,92% EOS 0,93% Binance Coin 11,99% BitcoinSV 17,8% Cardano 7,57% TRON 6,48% Stellar 0,58% Monero 3,06% 0,02886 0,0743 0,38838 Returns Volatility Sharpe Ratio We see that, EOS and XLM received a distribution of less than 1%, while Bitcoin was 28.86%, respectively, we have recently seen the dominance of Bitcoin and the fall of altcoins. In order to evaluate the results let’s test the optimal portfolio and compare it with the proportional distribution of % in the portfolio. Backtest Cryptocurrency Portfolio Using the backtesting module (where you can test your cryptocurrency investment strategies), we tested the optimal portfolio from the beginning of 2019, the weights of which were calculated using the efficient frontier and obtained the following results: holderlab.io 127.21% 227,79% -24,26% Profit Max.Profit Peak Max. Drawdown 66,6% Standart Deviation Let’s look at the results of the backtest of proportional distribution: 94.65% 192,97% -18,9% Profit Max.Profit Peak Max. Drawdown 57,88% Standart Deviation Profit was lower at 32.56, but the drawdown decreased by 5.36%. But we assume a high correlation of the cryptocurrency portfolio we have chosen for analysis and the need to further combine altcoins with a medium and medium-small capitalization. Thus, it can be noted that Modern Portoflio Theory, including the efficient frontier, can be applied to cryptocurrency portfolios and searching for the optimal portfolio weights. **The examples above are not a recommendation or investment guide. Holderlab.io is a free service for automated crypto portfolio management with automatic rebalancing of assets (threshold or periodic), searching for efficient frontier and analysing assets using a correlation matrix and other crypto investments tools.

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How We Can Apply Modern Portfolio Theory to the Сryptocurrency Markets

How We Can Apply Modern Portfolio Theory to the Сryptocurrency Markets

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