The Case for Bitcoin for Institutional Investors: Bubble Investing or Fundamentally Sound?

Abstract

In this work we assume the institutional investor role and analyze a possible investment in bitcoin (BTC). We document several salient features of BTC employing monthly returns over the period from August 2010 to October 2017. First, it provides unique diversification benefits for traditional institutional portfolios. This diversification benefit appears to be stable over our sample period. Second, bitcoin is very volatile, indeed, but the historical return to risk ratio appears attractive with a Sharpe Ratio of 1.176. Finally, using standard portfolio optimization tools we find that the optimal allocation to BTC is 1.3% over the sample we examined. We provide controversial evidence that institutional investors are under allocated to BTC.

Keywords: bitcoin, asset allocation, portfolio optimization, cryptocurrencies