Pradip Mitra

This paper investigates the relationship of cryptocurrencies with four traditional assets: equity, fiat currencies, crude oil, and gold in Nigeria, Vietnam, the Philippines, Turkey, and Peru. According to Statista’s 2020 Cryptocurrency Adoption Survey, these five countries showed high levels of crypto usage and ownership. Emerging economies attract the attention of portfolio managers due to the high returns associated with assets originating from these countries. The paper explores the possibility of creating a multi-asset portfolio, including cryptocurrencies. Vector Autoregression Granger causality and Johansen Cointegration tests are conducted to study the relationship between each traditional asset and cryptocurrencies. The study period is from October 2017 to June 2021. The composite Crypto Index was created using the top seven cryptocurrencies based on market capitalization. The Granger Causality test results reveal no causality between Nigeria’s chosen traditional assets and the cryptocurrency index. In the case of the Philippines, there is a unidirectional causality relationship from crypto returns to currency returns; and gold returns to crypto index returns. In Vietnam, stock index returns cause crypto returns; in Peru, gold returns cause crypto returns; and in Turkey, crypto returns cause currency returns. None of the countries has exhibited a bidirectional relationship between traditional assets and the crypto index. The robustness of the causality relations is checked using the Johansen Cointegration test. All the assets taken under study, country-wise, are cointegrated with one another. Hence, when building a multi-asset portfolio covering these five emerging nations, cryptocurrencies do not offer investors diversification, hedging, or haven benefits.

This paper uses Markowitz’s mean-variance model to construct an investment portfolio incorporating multiple assets – BRICS equity indices, Gold, crude oil, bonds, and cryptocurrencies. The optimally created risky portfolios outperform alternative portfolio optimization methods – the naive portfolio and the equal risk contribution portfolio; and established indices – the S&P 500 and the MSCI Emerging Equity Index in terms of metrics – adjusted Sharpe ratio, modified Sharpe ratio, and the modified Value at Risk. The findings are validated across different periods, including the COVID-19 period and the Russian invasion of Ukraine, including various in and out of sample periods. The findings highlight the benefits of portfolio diversity, mainly using BRICS indices, Gold, and Brent Crude oil, and challenge the notion of limited diversification benefits in BRICS indices found in previous studies. This paper further suggests the potential of emerging market bonds ETF as a diversification option during turbulent economic periods and highlights the limitations of cryptocurrencies in optimizing multi asset portfolios. By adopting the recommended multi asset portfolios, investors can enhance their risk-return trade-offs and achieve superior performance compared to the S&P500 and MSCI emerging indices. Lastly, the paper recommends future research opportunities in measuring portfolio performance and hedging strategies considering risk-adjusted return measurements, transaction expenses, and dynamic rebalancing techniques.