The optimization of the cryptocurrency portfolio in view of the risks

Abstract

It was determined that the profitabilities of the cryptocurrency are not subject to normal distribution due to the presence of heavy-tailed profitability. This condition does not allow the use of the classical theory of Markowitz's portfolio for the financial asset under consideration. Based on the Cauchy distribution function, the analytical expressions were obtained for the VaR risk measure and the cryptocurrency risk estimation calculations were performed using the VaR approach. Meanwhile, the risk assessment was found as the difference between the most expected value of profitability and the boundary of the risk zone. The set of optimal cryptocurrency portfolios was built based on the modified optimization Markowitz model. The results of the author's calculations have showed that the high profitability and low risk of Bitcoin determines its dominance in the cryptocurrency portfolio. An effective tool for managing the risks of the cryptocurrency portfolio may be its integration into the structure of Amazon stocks.