The Influence of Cryptocurrency Investments on Portfolio Risk Management in Indonesia

Abstract

Cryptocurrency is a new kind of asset that has emerged in the past ten years due to the development of financial technology. Cryptocurrency allows its users to remain anonymous and charges a nominal transaction fee without using a third party. It immediately gained widespread acceptance in the financial industry and became one of its primary selling factors. Price fluctuations for cryptocurrencies become erratic. For instance, when Bitcoin was first introduced in 2009, its value was only $10, but as of early June 2017, it was worth roughly $3,000 (Bloomberg, July 5, 2017). Many investors, particularly those with a high risk tolerance, are eager to invest in cryptocurrencies. The purpose of this study is to determine how cryptocurrencies affect well-constructed portfolios. We employ stocks, commodities, foreign exchange, and exchange-traded funds. We'll use Litecoin, Ripple, and Bitcoin as our cryptocurrency. We can build an investment portfolio by applying the Modern Portfolio Theory method. The findings demonstrate that adding cryptocurrency to a portfolio does, in fact, boost its efficacy in two ways. The first is to reduce the standard deviation, and the second is to provide investors with additional allocation possibilities. Depending on the investor's risk tolerance, the ideal cryptocurrency allocation ranges from 5% to 20%.