The Modern Portfolio Theory and Cryptocurrency

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Different Structure of Cryptocurrency Markets

Have you ever heard of the saying, “the higher risk, the higher the reward?” If so, you have heard of a version of the modern portfolio theory (MPT). It is one of the most popular and influential economic theories dealing with investments. The theory is a mathematical hypothesis in Harry Markowitz’s paper “Portfolio Selection” published by the Journal of Finance in 1952. It basically quantifies the benefits of diversifications and encourages investors to construct a diversified portfolio based on the maximum possible expected return for a given level of risk. In other words, it proves why it is so important to not put all your eggs in one basket.

Most of the investors who used MPT mostly used it for traditional equities such as stocks, properties, bonds, and cash. For example, a more risk-averse investor might hold onto more cash, bonds, and T-Bills in their portfolio to make less of a return, but would be viewed as a safer investment. A risk-taking investor would invest in more volatile stocks for potential gains associated with the high risk. The risk is measured by the standard deviation from the mean or average return whenever an investor buys an asset. The standard deviation from the mean is how risk is measured. However, MPT was written and interpreted in a world without cryptocurrency. So is there a cryptocurrency MPT?

The short answer is yes. Cryptocurrency could enhance return as a high-risk investment. Here are some criteria to choose the proper cryptocurrency into your portfolio. A coin that is worthy for investment must solve a problem, have an active community, have a user case, isn’t a brand new coin, have a real team, and isn’t a scam. Then there are other questions such as the storage ability for hardware wallets or paper wallets to reduce the risk with the cryptocurrency. There is a higher risk with cryptocurrencies if it touches the internet, so storing it in a cold wallet such as a hardware wallet or a paper wallet would reduce risk significantly.

This might be a good list of coins to get started with cryptocurrency investing:

Bitcoin: The original cryptocurrency released in 2009 after the financial downturn. Since its inception, more than 2000 altcoins have been released. An investor could also trade Bitcoin futures in CME.

Ethereum: Smart contracts created in the blockchain released in 2015. Since then, the Ethereum community has been growing nonstop. The price never dips too hard due to its core community who believe in the project.

Bitcoin Cash: Bitcoin Cash was a result of a hard fork in April 2017 to increase the block size of Bitcoin. Investors who were holding bitcoin received the same amount of bitcoin cash with the amount of bitcoin they were holding.

Litecoin: An early altcoin started in 2011 by Charlie Lee with the proposed value of decreasing the block generation time of 2.5 minutes and a different hashing algorithm.

Stellar: Founded in 2015 by Mt. Gox’s founder, Jed McCaleb, Stellar protocol is supported by a nonprofit, the Stellar Development Foundation. The network is now used by IBM, KlickEx, Deloitte, Parkway Projects, Tempo, Wanxiang Labs, and Stripe.

Dash: Open source cryptocurrency run by a subset of users, masternodes which permits fast transactions that can’t be traced. It was founded in 2014 so it is quite credible given its age.

Monero: Founded in 2014 focused on privacy, fungibility, and decentralization. It is one of the oldest coins in the crypto world. Since Monero doesn’t take GPU to mine, its mining community is increasing by the month.

Zcash: A privacy enhanced coin like Monero with a legit founding team including cryptographer Matthew D. Green from John Hopkins University and Roger Ver as one of their initial investors. Its mining community is also increasing in size.

NEM: It has a real-world application for businesses with smart assets system. Developers that depend on NEM’s technology is also increasing.

Zeus Exchange is the first exchange to trade cryptocurrencies to traditional equity and vice versa, so you could definitely put modern portfolio theory in practice.


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