The effect of cryptocurrencies on diverse portfolios

We examine whether cryptocurrencies provide any benefits if they are included in the well diversified portfolios. Their performance in a diversified portfolio is compared to those of standard currency and commodities. Optimal portfolios are created based on maximum Sharpe Ratio as well as on Global Minimum variance for two-asset, for three-asset and for four-asset portfolios, and the diversification effects obtained in each case are compared with the other assets, namely USD/TRY as standard currency and gold as commodity. For the four asset case, which is the most comprehensive case, where all types of currencies along with gold are added to the market portfolio, we repeat our analyses for the period of 04/05/21 - 04/28/23, which is the "main sample" period, for he "post-Covid-19 era," which includes the sub-sample period of 04/29/22 - 04/28/23, and for the "post-Covid-19 pre-Feb 6" period, which covers 04/29/22 – 02/03/23 excluding the period of the Feb. 6, 2023 great earthquake disaster in Turkey from the post-Covid-19 period. For each optimal portfolio, various risk and return metrics are estimated and compared. Our results show that cryptocurrencies can be good instruments for portfolio diversification in general. For our sample period, Etherium seems to perform better in diversified portfolios compared to Bitcoin.