Modern Cryptocurrency Portfolio Theory – Bitcoin Cash USD (Cryptocurrency:BCH-USD)

Why Modern Portfolio Theory doesn’t work with cryptos

Aside from the obvious (that Cryptocurrencies are not companies, they’re just software and the network of people involved), MPT asks the portfolio manager to make some basic assumptions.

1. We are able to estimate the likely return of an asset (to compare it to the likely risk and determine the efficient frontier)
2. We look for assets that are not highly correlated to reduce risk

Both of these are a big problem for cryptocurrencies, because the probable return is somewhere between zero and 100x, and nearly every cryptocurrency in the top 20 is highly correlated with Bitcoin (at least for now).

Image Source: Sifrdata

Cryptocurrency projects by sector

What about building a cryptocurrency portfolio based on sector?

I’d like to tell you that it’s possible to just look at the different categories of cryptocurrency projects out there, and just build a sector weighted portfolio like you might do with traditional equities. If that were…