Crypto currencies: A Profitable Potential for International Portfolio Diversification in Times of Geopolitical Crisis?

In this study, we explore the impact of incorporating crypto currencies, including Bitcoin, Ethereum, Dogecoin, Ripple and Litecoin, into five traditional financial portfolios, consisting of equities, tech stocks, commodities, oil and currencies. Using data covering the period from August 2015 to December 2024, with a daily frequency, we evaluate the performance of these portfolios by applying three performance measures, including the Naïve equal-weight portfolio, the portfolio based on the Markowitz Mean-Variance approach, and the optimized Sharpe ratio. Our results highlight that integrating cryptocurrencies into traditional portfolios improves riskadjusted returns. Ethereum stands out as offering promising advantages over Bitcoin in terms of diversification. In fact, this study contributes to the financial literature by exploring the diversification of existing portfolios with multiple cryptocurrencies and extending the analysis to the post period including the COVID-19 crisis, the Russia-Ukraine conflict and the IsraelPalestine conflict. Our results have significant implications for investors and financial analysts seeking to improve their portfolio's risk/return profile in a financial environment characterized by geopolitical and economic turbulence.