DefinePK

Research Objective

To examine the potential for cryptocurrencies to be considered an alternative investment asset class within the Pakistani investment context, assessing investor perceptions and evaluating the risk-return payoff of a hypothetical cryptocurrency portfolio against traditional assets.

Methodology

The study employed a mixed-methods approach. A survey was distributed to 250 active Pakistani investors (233 usable responses) to gauge familiarity, perceptions, and adoption rates of cryptocurrencies. Historical price data for Bitcoin, Ethereum, an alternative cryptocurrency basket, a stablecoin basket, the KSE100 index (stocks), and 3-month T-Bills (bonds) from January 2017 to December 2021 was collected. A hypothetical equally weighted cryptocurrency portfolio was backtested, and its performance metrics (annualized returns, volatility, maximum drawdown, Sharpe ratio, Sortino ratio) were compared against Pakistani stocks and bonds. Survey data was analyzed using summary statistics and significance tests (t-tests, ANOVA), with qualitative responses reviewed for common themes.

Methodology Flowchart

                        graph TD;
    A["Survey Design & Distribution"] --> B["Data Collection: Survey Responses"];
    C["Historical Price Data Collection"] --> D["Data Collection: Crypto, Stocks, Bonds"];
    B --> E["Survey Analysis"];
    D --> F["Portfolio Simulation"];
    E --> G["Investor Perceptions & Adoption Insights"];
    F --> H["Risk-Return Metrics Calculation"];
    G --> I["Synthesize Findings"];
    H --> I;
    I --> J["Conclusion & Recommendations"];                    

Discussion

Cryptocurrencies exhibit characteristics of an alternative investment asset class, offering high return potential and diversification benefits for Pakistani investors. However, their high volatility and significant drawdowns present considerable risks, which may explain the low adoption rates despite moderate familiarity. Investor perceptions align with the observed high-risk, high-reward profile. The study suggests that while cryptocurrencies can complement portfolios, comprehension gaps, regulatory uncertainty, and volatility concerns are barriers to wider uptake in Pakistan.

Key Findings

- Over 65% of Pakistani investors surveyed reported moderate to high familiarity with cryptocurrencies, but adoption rates remained low (under 20%).
- 68% of investors perceive crypto as a legitimate asset class, and 88% see its diversification potential, yet 89% perceive it as high risk and 92% as highly volatile.
- A hypothetical cryptocurrency portfolio generated significantly higher annualized returns (75%) compared to KSE100 stocks (29%) and bonds (12%) over the 2017-2021 period.
- The cryptocurrency portfolio also exhibited substantially higher annualized volatility (62%) and maximum drawdown (-72%) compared to stocks (-38%) and bonds (-8%).
- On a risk-adjusted basis (Sharpe Ratio), the crypto portfolio (1.05) underperformed the KSE100 (0.79) but outperformed bonds (1.32).

Conclusion

Cryptocurrencies present a high-risk, high-return asset class with diversification potential for Pakistani investor portfolios. While historical simulations show superior absolute returns, the amplified volatility tempers risk-adjusted performance. Further research into regulation, governance, and long-term investment horizons is advised, alongside updated surveys as the cryptocurrency ecosystem evolves within Pakistan's developing regulatory framework.

Fact Check

- Over 18,000 cryptocurrencies existed with a total market capitalization of over $900 billion USD as of 2022. (Confirmed by introduction)
- The hypothetical cryptocurrency portfolio generated 75% annualized returns over the 2017-2021 period. (Confirmed by Table 3)
- 233 usable survey responses were collected from an initial distribution to 250 active Pakistani investors. (Confirmed by Methodology)

Mind Map