Optimal Shares of NFT, DeFi and Bitcoin on Czech, Hungarian, and Polish Equity Markets

Izabela Pruchnicka-Grabias

doi:10.18778/1508-2008.28.02

Authors

Izabela Pruchnicka-Grabias Warsaw School of Economics, Warsaw, Poland https://orcid.org/0000-0002-7385-6286

DOI:

https://doi.org/10.18778/1508-2008.28.02

Keywords:

NFT, DeFi, Bitcoin, optimization, diversification, Czech Republic, Poland, Hungary

Abstract

The purpose of the paper is to present the results of the research on the potential inclusion of different types of crypto assets, such as Bitcoin, NFTs (Non-Fungible Tokens), and DeFi (Decentralised Finance), within optimal portfolios to help reduce variance or increase returns compared to equity investments. The analysis includes comparisons of different crypto assets and countries, specifically the Czech Republic, Hungary, and Poland.

The author constructs optimal equity-crypto portfolios in the Markowitz environment for the period from 16 February 2021 to 8 January 2024, which was adjusted to NFT data availability from this date. Calculations are conducted under two scenarios: minimizing portfolio variance and maximizing returns.

The research demonstrates that Bitcoin, NFTs and DeFi can be part of a well-diversified equity portfolio, primarily due to their low correlation with equity markets in the Czech Republic, Hungary and Poland.

The paper is important for investors seeking diversification possibilities. Although diversification has been increasingly difficult recently due to increasing correlation coefficients between assets, new asset classes, such as crypto assets, have been created, offering new potential for portfolio creation. The conclusions drawn may also be vital for policymakers who should consider them when formulating regulations concerning systematic risk.

The paper contributes value in four aspects. 1) The paper demonstrates that including NFTs, DeFi and Bitcoin in a stock portfolio creates diversification benefits for most portfolios. This is partially due to their slightly higher returns but mostly because of the lower risk that results from the low correlation of crypto assets with traditional markets. 2) Optimal shares of crypto assets differ depending on the equity and the crypto involved. 3) The paper considers Czech, Hungarian, and Polish markets while existing papers concentrate mostly on the American market. 4) The paper shows that there are minimal connections between the Czech, Hungarian, and Polish equity markets and crypto assets.

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