Combining Islamic Equity Portfolios and Digital Currencies: Evidence from Portfolio Diversification

Abstract

Digital currencies are unregulated and potentially have a destabilizing effect coupled with increased concerns over capital gains and losses in a high volatility environment. When added to a portfolio, this currency may have certain driving factors in terms of return and risks in the case of portfolio diversification. In this study, from the Sharia angle, we follow the position of Monzer Kahf (Fatwa on Bitcoin (by Monzer Kahf). http://lightuponlight.com/blog/fatwa-on-bitcoin-by-monzer-kahf/. Accessed 03 Feb 2020, 2017) who explained that Bitcoin is considered “Like any other currency”. It should be used under the “same conditions of exchanging currencies”. Therefore, we explore the effects of adding digital currencies to an Islamic portfolio by relying on a mean-variance efficient frontier and comparing the risk-return of portfolios with and without digital currencies for different scenarios. The results show that by adding digital currencies to Shariah-compliant portfolios, its performance improves; but this depends more or less on the increase in returns than in the reduction of total risk. Specifically, digital currencies may have a big role in bringing high risks with speculative effect in portfolio diversification. Therefore, we provide some recommendations to investors and regulators to secure these currencies in Islamic capital markets.