Build a Portfolio of Cryptocurrencies using Modern Portfolio Theory

Are you ready to strike rich in the modern day gold rush? In this article, I will show you how to build a portfolio of cryptocurrencies using systematic analysis based on modern portfolio theory.

In a previous article, I introduced you to the wonderful world of investing in cryptocurrencies. If this is the first time you have heard about them, I recommend you read that article and come back to this only when you have some experience of buying and holding on to cryptocurrencies. In this article, we will take a look at a systematic method for building and managing your portfolio of cryptocurrencies.

What is Modern Portfolio Theory (MPT)?

The name modern portfolio theory is kinda of a misnomer, since MPT is neither new nor a theoretical framework. It is a mathematical framework for building a portfolio of assets so that the expected return is maximised for a given amount of risk. As an example take a look at the above figure, on the Y-axis we have the average annual returns of an asset while on the X-axis we have the risk measured as the standard deviation of annual returns. If we consider just two asset classes — Stocks and Bonds, we can plot the returns of different portfolios that combine these classes together, from a combination that is 100% bonds to…