Entropy-Based Portfolio Optimization in Cryptocurrency Markets: A Unified Maximum Entropy Framework

Traditional mean–variance portfolio optimization proves inadequate for cryptocurrency markets, where extreme volatility, fat-tailed return distributions, and unstable correlation structures undermine the validity of variance as a comprehensive risk measure. To address these limitations, this paper proposes a unified entropy-based portfolio optimization framework grounded in the Maximum Entropy Principle (MaxEnt). Within this setting, Shannon entropy, Tsallis entropy, and Weighted Shannon Entropy (WSE) are formally derived as particular specifications of a common constrained optimization problem solved via the method of Lagrange multipliers, ensuring analytical coherence and mathematical transparency. Moreover, the proposed MaxEnt formulation provides an information-theoretic interpretation of portfolio diversification as an inference problem under uncertainty, where optimal allocations correspond to the least informative distributions consistent with prescribed moment constraints. In this perspective, entropy acts as a structural regularizer that governs the geometry of diversification rather than as a direct proxy for risk. This interpretation strengthens the conceptual link between entropy, uncertainty quantification, and decision-making in complex financial systems, offering a robust and distribution-free alternative to classical variance-based portfolio optimization. The proposed framework is empirically illustrated using a portfolio composed of major cryptocurrencies—Bitcoin (BTC), Ethereum (ETH), Solana (SOL), and Binance Coin (BNB)—based on weekly return data. The results reveal systematic differences in the diversification behavior induced by each entropy measure: Shannon entropy favors near-uniform allocations, Tsallis entropy imposes stronger penalties on concentration and enhances robustness to tail risk, while WSE enables the incorporation of asset-specific informational weights reflecting heterogeneous market characteristics. From a theoretical perspective, the paper contributes a coherent MaxEnt formulation that unifies several entropy measures within a single information-theoretic optimization framework, clarifying the role of entropy as a structural regularizer of diversification. From an applied standpoint, the results indicate that entropy-based criteria yield stable and interpretable allocations across turbulent market regimes, offering a flexible alternative to classical risk-based portfolio construction. The framework naturally extends to dynamic multi-period settings and alternative entropy formulations, providing a foundation for future research on robust portfolio optimization under uncertainty.