The Implementation of Modern Portfolio Theory on New Financial Assets: Evidence from Cryptocurrencies

Abstract

Modern Portfolio Theory (MPT) has long been a cornerstone in the realm of finance, aiding investors in navigating the complex terrain of risk and reward associated with diverse assets. This theory, formulated by Harry Markowitz in the 1950s, has traditionally guided investment decisions by optimizing the balance between different assets to achieve the desired level of risk and return. However, with the meteoric rise of cryptocurrencies as a new asset class, there is an increasing curiosity surrounding the applicability of MPT to this digital phenomenon. In response to this curiosity, this article undertakes the task of comprehensively assessing the compatibility of MPT with cryptocurrencies. To accomplish this, the research aggregates and analyzes the existing body of knowledge, thereby offering insights into the intersection of modern portfolio theory and the age of cryptocurrencies. A systematic literature review is conducted, encompassing 21 pertinent studies that explore various facets of this confluence. The findings of this article underscore an emerging trend in research, one that showcases the adaptability of MPT to innovative financial instruments like cryptocurrencies. These studies collectively illuminate the ways in which MPT can be employed to optimize portfolios that include digital assets, shedding light on strategies that account for the unique risk-return dynamics inherent in the crypto market. As the cryptocurrency landscape continues to evolve, it is evident that Modern Portfolio Theory is not only relevant but also adaptable, providing valuable tools to guide investors through the exciting yet volatile terrain of digital finance.