Should stock investors include cryptocurrencies in their portfolios?

Should Stock Investors Include Cryptocurrencies in Their Portfolios?
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 Abstract
Cryptocurrencies have recently emerged as the best digital asset though their inclusion in investor's portfolios is little. Investors' strong need in the stock market of cryptocurrency might create close links to previous purchases, resulting in low beneficial returns from the investments. This study investigates the returns of including cryptocurrencies in the investment portfolios using a time series analysis to identify different cryptocurrencies' status over time. Their respective market capitalization will be analyzed to guide investors on the inclusion of cryptocurrencies in portfolios. The results prove that adding cryptocurrency to one's portfolio improves returns. Hence, the investor can rely on either the substantial assets or the digital ones. These results significantly provide guidance insights and hindrances to stock investors.Keywords: Cryptocurrency, investment, portfolio, stocks, investors
 Should Stock Investors Include Cryptocurrencies in Their Portfolios?
Introduction
Cryptocurrency is becoming a popular form of investment across the world. They decentralized assets that are intended to provide a medium of exchange using blockchain technology. One of the main features of cryptocurrency is the lack of authority and physical representation. As the popularity of cryptocurrency continues to increase, many people wonder whether they should include it in their stock portfolios. Investors always look for assets that can earn higher returns (Demiralay & Bayracı, 2020). The values of cryptocurrency have continued to grow, and there are many alternative assets. It has emerged as an alternative form of investment with the potential of giving significant returns if done correctly. Many people worldwide are considering investing in these currencies because of potential returns and exponential value growth. However, there is a lack of empirical information on statistical evidence that cryptocurrencies value their clients.
There is still much controversy about whether people should invest in bitcoin and other cryptocurrencies. This is because there is a lack of understanding of what cryptocurrencies are and what benefits they have to investors. In the current times, there are various arguments in favor and against cryptocurrency investment. When bitcoin's value decreased in 2018, many people have shunned investing in these platforms because of the perceived risks and potential losses associated with cryptocurrency's unpredictable nature. However, most of these arguments are based on speculations without a strong basis of what it means or what it entails to invest in the asset (Platanakis & Urquhart, 2019).
Advantages of Cryptocurrency Over Stocks
There have been projections from financial analysts claiming there will be significant growth in the value of cryptocurrency. This is because many institutionalized money markets are investing in the portfolio. We may see different cryptocurrency portfolios being included in mainstream stock exchange markets (Barone, 2019). Many people are still considering crypto in negative ways because there is a lack of institutional management. Cryptocurrency is expected to have a verified exchange-traded fund. This would make it easy for individuals to invest. The demand to invest in a crypto is projected to grow in the coming years. Still, there is a need to understand the diverse interplays in the crypto management system. This will ensure that investors know what they are investing in, what risks are involved, and the potential returns when they invest.
There are several advantages of a cryptocurrency over regular stocks. As technology continues to advance, there will be more opportunities to invest in cryptocurrency. There are several advantages associated with cryptocurrency that explain why investors should consider having them in their portfolio. First, cryptocurrency allows for easier transactions. It is easier to buy and sell through different trading platforms (IG, n.d.). These platforms are operated by individuals and managed by the investor. It is easy for the investor to choose when to sell or buy more cryptocurrency assets. On the other hand, investing in stock entails an individual's need to deal with brokers, legal experts, agents, and institutions. This increases the expense of having stocks compared to cryptocurrency. Cryptocurrency is also an international trade platform and is never controlled by any country. Individual ownership of the crypto assets makes it easier for people to buy and sell (BTCLOOPHOLE.APP, 2020).
Features of Cryptocurrency
Several unique cryptocurrency features make it the best option for people who want to diversify their assets. First, it is decentralized and operated digitally. There is never a single group that controls the presence of cryptocurrency. The technology is governed by the algorithm and can be accessed from anywhere through the internet. Another essential feature is that it is flexible and easy to set up. This makes it an efficient investment for any person. There is no much skill in setting up cryptocurrency wallets, and transactions within the cryptocurrency technology are transparent and undertaken in broad day-light. This allows easier understanding and management of one's wallet and across the network. It is also fast and involves low transactions compared to investing in stocks. This makes the overall investment value and the best alternative for people who want to succeed in cryptocurrency investment (Lee, Guo, & Wang, 2018).
Methodology
This paper will undertake a time series analysis to investigate the weight of market capitalization of different cryptocurrencies in the market over time. We will run both the ARIMA and the GARCH model to compare the effects of the stocks on the investor's portfolio. This is because portfolio maximization requires a stead process to help estimate the variance-covariance matrix of the assets. Historical returns will be used to calculate the covariance matrix of the returns equally. Researchers have widely used this over time and are expected to offer significant results on this study. The only restrictive measure is that due to market returns' daily volatility and its behavior to rise and fall, some other models may fail and lead to the use of the multivariate GARCH model. The multivariate GARCH model helps to capture the time-varying correlations among the cryptocurrency and stock market returns.
The GARCH model used to estimate the ever-changing correlations of stock markets will be as follows;
Pt = µ + Pt-1+ Zt
Where the Pt  represents the vector of the stock market and cryptocurrency returns in an asset portfolio and follows and autoregressive 1 process with Zt  as the filtered returns, which is white noise (WN) with mean zero and variance of σ2The data set includes daily closing prices, opening prices, cryptocurrency market capitalization, and respective high and low attained prices of different cryptocurrencies. The data also contains the volume of the cryptocurrency in the stock market. This birth is the date of launching the crypto and age as its respective period in the market. Death denotes whether the currency had died or still alive in the market. In contrast, the lifespan indicates when the cryptocurrency had survived in the market before it died or time thrived in the market in months.
The stock market data will be downloaded from Bloomberg, while the cryptocurrency data will be downloaded from https://coinmarketcap.com/. The data obtained from the period of the year 2015 is monthly adjusted. The returns of the cryptocurrency and the stock markets will be continuously compound as Pt, and it can be calculated as follows; Pt=100*log (pt/pt-1) where pt is the price at time t.
 Results
  Mean Median Max. Min. Std. D. Skew. Kurt. JB BP BP2 ARCH ADF
Developed Markets Australia 0.019 0.056 3.285 -4.176 0.828 -0.412 5.373 244.9a 26.229a 226.34 4.997a -10.236a
Canada 0.021 0.063 2.897 -3.844 0.724 -0.418 5.74 318.4a 33.090b 708.660a 15.050a -10.414a
France 0.006 0.037 4.232 -8.384