Should Investors Include Bitcoin in Their Portfolios? A Portfolio Theory Approach

The British Accounting Review, Forthcoming

41 Pages Posted: 7 Aug 2018 Last revised: 23 Jun 2019

See all articles by Emmanouil Platanakis

Emmanouil Platanakis

University of Bath - School of Management

Andrew Urquhart

ICMA Centre, Henley Business School

Date Written: June 21, 2019

Abstract

Many papers in recent years have examined the benefits of adding alternative assets to traditional portfolios containing stocks and bonds. Bitcoin has emerged as a new alternative investment for investors which has attracted much attention from the media and investors alike. However relatively little is known about the investment benefits of Bitcoin and therefore this paper examines the benefit of including Bitcoin in a traditional benchmark portfolio of stocks and bonds. Specially, we employ data up to June 2018 and analyse the potential out-of-sample portfolio benefits resulting from including Bitcoin in a stock-bond portfolio for a range of eight popular asset allocation strategies. The out-of-sample analysis shows that, across all different asset allocation strategies and risk aversions, the benefits of Bitcoin are quite considerable with substantially higher risk-adjusted returns. Our results are robust to rolling estimation windows, the incorporation of transaction costs, the inclusion of a commodity portfolio, alternative indices, short-selling as well as two additional optimization techniques including higher moments with (and without) variance-based constraints (VBCs). Therefore, our results suggest that investors should include Bitcoin in their portfolio as it generates substantial higher risk-adjusted returns.

Keywords: Bitcoin; Diversification; Out-of-Sample Performance; Portfolio Optimization

JEL Classification: G11, G12, G15

Suggested Citation

Platanakis, Emmanouil and Urquhart, Andrew, Should Investors Include Bitcoin in Their Portfolios? A Portfolio Theory Approach (June 21, 2019). The British Accounting Review, Forthcoming. Available at SSRN: https://ssrn.com/abstract=3215321 or http://dx.doi.org/10.2139/ssrn.3215321

Emmanouil Platanakis (Contact Author)

University of Bath - School of Management ( email )

Claverton Down
Bath, BA2 7AY
United Kingdom

Andrew Urquhart

ICMA Centre, Henley Business School ( email )

University of Reading
Whiteknights
Reading, Berkshire RG6 6BA
United Kingdom

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