Author(s): Newman Wadesango
This study investigates the role of cryptocurrencies in enhancing investment portfolio diversification and managing financial risk, with a specific focus on commercial banks operating within the Zimbabwean financial sector. The research is grounded in key financial and behavioral theories, including Principal-Agent Theory, Modern Portfolio Theory, and Prospect Theory, which collectively provide a conceptual framework for analyzing the decision-making dynamics and strategic implications of cryptocurrency investments. The study explores both the theoretical justifications and empirical evidence supporting the integration of digital assets in institutional portfolios. Findings from previous research indicate that cryptocurrencies may serve as effective hedging tools and safe-haven assets due to their relatively low correlation with traditional asset classes. However, challenges such as price volatility, regulatory uncertainty, and liquidity constraints limit their universal applicability. Additionally, commercial banks in Zimbabwe employ various risk management strategies—ranging from portfolio diversification and hedging instruments to thorough due diligence—to mitigate exposure to the inherent risks of cryptocurrency investments. The study concludes that while cryptocurrencies offer notable benefits for risk mitigation and portfolio optimization, their integration requires cautious and well-informed approaches. The research thus contributes to the ongoing discourse on alternative investment strategies in emerging markets and provides practical insights for financial institutions navigating digital asset inclusion.