Caveat Emptor: Does Bitcoin Improve Portfolio Diversification?

21 Pages Posted: 15 Mar 2014 Last revised: 4 Jun 2015

See all articles by Alexander Eisl

Alexander Eisl

Vienna University of Economics and Business

Stephan Gasser

Vienna University of Economics and Business - Institute for Finance, Banking and Insurance

Karl Weinmayer

Modul University Vienna - Department of International Management; Vienna University of Economics and Business - Institute for Finance, Banking and Insurance

Date Written: June 3, 2015

Abstract

Bitcoin is an unregulated digital currency originally introduced in 2008 without legal tender status. Based on a decentralized peer-to-peer network to confirm transactions and generate a limited amount of new bitcoins, it functions without the backing of a central bank or any other monitoring authority. In recent years, Bitcoin has seen increasing media coverage and trading volume, as well as major capital gains and losses in a high volatility environment. Interestingly, an analysis of Bitcoin returns shows remarkably low correlations with traditional investment assets such as other currencies, stocks, bonds or commodities such as gold or oil. In this paper, we shed light on the impact an investment in Bitcoin can have on an already well-diversified investment portfolio. Due to the non-normal nature of Bitcoin returns, we do not propose the classic mean-variance approach, but adopt at Conditional Value-at-Risk framework that does not require asset returns to be normally distributed. Our results indicate that Bitcoin should be included in optimal portfolios. Even though an investment in Bitcoin increases the CVaR of a portfolio, this additional risk is overcompensated by high returns leading to better risk-return ratios.

Keywords: Bitcoin, Portfolio Optimization, Conditional Value at Risk, Virtual Currencies

JEL Classification: G11, G15, F31

Suggested Citation

Eisl, Alexander and Gasser, Stephan and Weinmayer, Karl, Caveat Emptor: Does Bitcoin Improve Portfolio Diversification? (June 3, 2015). Available at SSRN: https://ssrn.com/abstract=2408997 or http://dx.doi.org/10.2139/ssrn.2408997

Alexander Eisl

Vienna University of Economics and Business ( email )

Heiligenstadter-Strasse 46-48
Vienna, Wien A-1190
Austria

Stephan Gasser (Contact Author)

Vienna University of Economics and Business - Institute for Finance, Banking and Insurance ( email )

Welthandelsplatz 1
Building D4
Vienna, 1020
Austria
+43 1 31336 6245 (Phone)

HOME PAGE: http://https://www.wu.ac.at/finance/people/faculty/gasser/

Karl Weinmayer

Modul University Vienna - Department of International Management ( email )

Am Kahlenberg 1
Vienna, 1190
Austria
+43-1-3203555-653 (Phone)

Vienna University of Economics and Business - Institute for Finance, Banking and Insurance ( email )

Welthandelsplatz 1
Building D4, 4th floor
Vienna, 1020
Austria

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