THE ROLE OF CRYPTO ASSET DIVERSIFICATION IN REDUCING RETAIL INVESTOR PORTFOLIO RISK
Keywords:
crypto assets; portfolio diversification; retail investors; portfolio risk; Bitcoin; rebalancingAbstract
Crypto assets are often promoted to retail investors as a diversifier that can reduce portfolio risk. This study examines whether, and in what sense, this claim holds for Indonesian retail investors. Using daily data from 3 January 2018 to 30 June 2026, it adds allocations of 0 to 20% in Bitcoin to conservative, moderate, and aggressive portfolios of Indonesian stocks, government bonds, and gold, and compares a single coin crypto allocation with diversified crypto baskets. Risk is measured by volatility, Value at Risk, Expected Shortfall, maximum drawdown, and risk contributions, and differences in Sharpe ratios are tested with a stationary block bootstrap. The results show that crypto does not reduce total portfolio volatility: because its volatility is about 4 times that of stocks, even a 5% allocation raises the volatility of the moderate portfolio from 8.2% to 9.1% and accounts for 20% of its risk. However, its low correlation with traditional assets (0.24 with stocks) means that small allocations raise risk less than proportionally, improve the Sharpe ratio significantly, and even reduce the maximum drawdown and the worst monthly loss. Diversifying across several coins within the crypto allocation does not reduce risk, since crypto assets are highly correlated with one another (average correlation 0.75). Disciplined rebalancing is essential: without it, a 5% allocation drifted to as much as 42% of the portfolio and doubled its volatility. The findings suggest that crypto improves risk adjusted returns when held in small, rebalanced positions, rather than reducing risk in absolute terms.
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Copyright (c) 2026 Adang Sutisna, Nur Fitriyani, Arasy Alimudin, Sengguruh Nilowardono, I Gede Arimbawa
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