The effect of crypto index on portfolio diversification

The rapid growth of cryptocurrency markets and their increasing presence in the financial ecosystem have laid the groundwork for new academic studies examining the role of these assets in investment portfolios. This study aims to analyze the impact of incorporating a crypto index into a portfolio composed of traditional financial instruments in the Turkish financial markets, with a focus on the portfolio's risk-return structure. In the study, portfolios created using basic financial assets such as foreign exchange, BIST 100, gram gold, housing price index, deposit interest and the integration of the crypto index are comparatively evaluated. The dataset, covering the period from January 2015 to January 2025 with quarterly frequency, was obtained from https://www.tradingview.com/ and https://tr.investing.com/crypto/bitcoin. The Markowitz Model was applied to reach efficient frontiers that balance risk and return. Additionally, the Single Index Model and Sharpe Ratio were used to systematically analyze various portfolio compositions and evaluate their performance. These tools allowed for a detailed assessment of how different asset combinations affect risk and return, helping to identify the most optimal portfolio configurations. The data collection date is 27.05.2024. The study shows that the crypto index can make a significant contribution to portfolio diversification under certain conditions, especially by improving the risk-return profile. However, due to the inherent risks of cryptocurrencies, such as high volatility and price fluctuations, investors should be cautious and adopt dynamic risk management strategies. Empirical evidence was provided to support the contribution of the crypto index to diversification, leading to the development of sustainable and balanced investment strategies. While the inclusion of the crypto index enhances portfolio diversification under specific conditions, its high volatility must be carefully managed to fully benefit from its potential.