The Impact of Cryptocurrency Integration in Investment Portfolios on Risk and Return in Financial Markets

Abstract

Cryptocurrencies have become an integral part of the global financial system, attracting investors' attention due to the potential for high returns they offer. However, its highly volatile nature poses challenges in risk management, especially in the context of integrating cryptocurrencies into investment portfolios. The study aims to analyze the impact of cryptocurrency integration in portfolios on risk and return in financial markets. The approach used is a literature study, by reviewing various scientific sources related to investment theory, portfolio diversification, and digital asset volatility. The results of the study show that cryptocurrencies have a low correlation with traditional financial assets, making them an instrument that has the potential to increase diversification in investment portfolios. However, the high volatility of cryptocurrencies also increases systemic risks, especially during periods of economic instability. Several analyzed studies concluded that a small portion of cryptocurrency allocation (1-5%) can increase the return-to-risk ratio (Sharpe Ratio) without significantly increasing the overall volatility of the portfolio. On the other hand, proper risk management, such as hedging strategies and risk-parity, is necessary so that investors can take advantage of the benefits of diversification without incurring large losses due to extreme price movements. These findings indicate that the integration of cryptocurrencies in investment portfolios can provide benefits for investors who have the right risk mitigation strategies, but still require stricter regulation to ensure financial stability globally.