SIMULATING CRYPTOCURRENCY PORTFOLIO RISK: A Monte Carlo Comparison of Bitcoin, Ethereum, and Mixed Crypto Portfolios
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Cryptocurrency investing is often discussed in terms of high returns, but the risk side is just as important. This study uses Monte Carlo simulation to examine how a $10,000 investment could behave over one year when it is placed in Bitcoin, Ethereum, or a portfolio combining both assets. The simulation uses 10,000 one-year paths with 252 daily observations per path. Daily return and volatility assumptions are based on recent academic evidence, while a 0.79 Bitcoin–Ethereum return correlation is used to preserve the fact that the two assets often move together. Five allocations are compared: 100% Bitcoin, 80% Bitcoin/20% Ethereum, 60% Bitcoin/40% Ethereum, 50% Bitcoin/50% Ethereum, and 100% Ethereum. The results show that Bitcoin produced the lowest simulated volatility and downside risk in this specific model. Adding Ethereum gradually increased expected upside but also increased annualized volatility, the probability of finishing below the initial investment, Value at Risk, and Conditional Value at Risk. The main lesson is therefore not that diversification is useless, but that diversification depends on what is being combined. When two assets are strongly correlated and one is materially more volatile, simply splitting money between them may not reduce risk. The study demonstrates how simulation can turn uncertain crypto outcomes into a range of measurable scenarios and can support more informed risk analysis without pretending to predict the exact future price of either cryptocurrency.
Keywords
Bitcoin, Cryptocurrency, Diversification, Ethereum, Monte Carlo Simulation, Portfolio Risk, Value At Risk