EVALUATING CRYPTO PORTFOLIO PERFORMANCE

Cryptocurrency draws a lot of attention from both the academic community and investors, government regulators and the general public. It is not yet fully understood whether it is a type of digital financial asset or a new form of money. The legal status of cryptocurrency varies substantially across countries, and is uncertain in Ukraine.
The purpose of the article is to determine the characteristics of cryptocurrency and its legal status in Ukraine, to create well-formed cryptocurrency portfolios with different risk and returns, to evaluate their performance, to explorе portfolio diversification opportunities through cryptocurrencies in new financial reality.
There are three features that distinguish cryptocurrency market: high risk due to volatility of returns, fundamental value is unclear, investors are non-institutional. The following key characteristics of cryptocurrency are defined: decentralized and no central authority; anonymous; irreversible and immutable (can not be undone); limited supply and scarcity; the use of a peer-to-peer database; secure; trustless; global; fast.
Despite the awareness of state regulators about the opportunities and threats that could be expected from cryptocurrency, the approach may be different due to the country: the absolute prohibition (Nepal, Pakistan, Vietnam, etc.); the neutral status (most countries), cryptocurrency transaction registration and licensing required (Italy, Australia and Japan, etc.), permission to use a cryptocurrency as a mean of payment (Isle of Man, Mexico).
Central banks strongly emphasize the distinguish of cryptocurrencies, that are not supported by any official authority, from legal means of payment and financial assets, recognizing the dangers that cryptocurrency investors may face due to its speculative nature. Because cryptocurrencies can potentially be used for illicit activities, tax evasion, legislative acts need to be developed and implemented in Ukraine now. The draft law proposes to consider cryptocurrency as a virtual asset in the form of a token that is generated,accounted for and disposed of in a distributed registry and does not certify the proprietary and/or non-proprietary rights of the cryptocurrency owner. Therefore, cryptocurrency can be seen as an individual asset class suitable for portfolio investing.
To justify an investment in cryptocurrencies by non-institutional investors optimal portfolios were constructed using the Markowitz and Quasi-Sharpe models. The calculations showed that cryptocurrency portfolios performed on the basis of the Markowitz model allow to improve the investment returns, but are not sufficiently diversified. A large number of diversified portfolios with different returns and risk were obtained by Quasi-Sharpe model. They offer the highest expected return for a specific level of risk.

It has been empirically established that cryptocurrencies have weak brelationships with traditional asset classes. That is why portfolio diversification with cryptocurrencies can significantly improve the investment result.
Despite jaw-dropping returns, cryptocurrencies are rife with risk because of excessive volatility, no fundamental backing by a central bank or a government, low scalability, regulatory issues, limited use, activities of hackers and cybercriminals.