Bitcoin and Portfolio Diversification: Portfolio Optimization Approach

19 Pages Posted: 31 May 2020

See all articles by Audil Khaki

Audil Khaki

American University of the Middle East; American University of the Middle East

Somar Al-Mohamad

American University of Middle East. Kuwait

Walid Bakry

Western Sydney University

Nasser El-Kanj

American University of the Middle East (AUM)

Date Written: May 31, 2020

Abstract

The fundamental objective of portfolio diversification is to construct a portfolio of uncorrelated or mildly correlated assets so as to maximize the risk-adjusted returns on a portfolio. Portfolio Optimization is one of the techniques used by investment professionals to explore the potential of different assets in maximizing the risk-adjusted returns of the portfolio by adjusting the weight of each asset using simulations or constrained scenarios. A significant amount of research has already been conducted in the area of portfolio diversification that helps investors in devising their investment strategies and policies. Cryptocurrencies in general, and Bitcoin in particular, have aroused significant interest among investment professionals, policymakers, and regulators alike. Although much research has primarily focused on the legal and technological aspects of Bitcoin, the examination of other financial, diversification, hedge, and safe-haven aspects of Bitcoin has not progressed as far. This study explores the potential of Bitcoin as an alternative asset, and its potential in portfolio diversification, by using the portfolio optimization approach. The study employs the portfolio optimization approach under multiple constraining scenarios to evaluate the effectiveness of Bitcoin in portfolio diversification. A Monte-Carlo Simulation approach is then employed to evaluate the outcomes under each scenario by randomizing the outcomes of portfolio optimization. This study suggests that Bitcoin, due to its exotic nature, unwavering appeal, and unknown set of drivers, could at best act as a diversifier rather than a hedge or a safe-haven.

Keywords: Bitcoin, Cryptocurrencies, Portfolio Optimization, Portfolio Diversification, COVID-19

Suggested Citation

Khaki, Audil Rashid and Al-Mohamad, Somar and Bakry, Walid and El-Kanj, Nasser, Bitcoin and Portfolio Diversification: Portfolio Optimization Approach (May 31, 2020). Available at SSRN: https://ssrn.com/abstract=3614606 or http://dx.doi.org/10.2139/ssrn.3614606

Audil Rashid Khaki (Contact Author)

American University of the Middle East ( email )

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+965 2225 1400 (Fax)

HOME PAGE: http://aum.edu.kw

American University of the Middle East ( email )

Eqaila
Kuwait
Kuwait, Ahmadi 15453
Kuwait
+965 2225 1400 (Phone)
+965 2225 1400 (Fax)

HOME PAGE: http://www.aum.edu.kw

Somar Al-Mohamad

American University of Middle East. Kuwait ( email )

Block 6, Building 1
Egaila
Kuwait
2225 1400 (Phone)

Walid Bakry

Western Sydney University ( email )

Sydney
1 Parramatta Square, 169 Macquarie Street, Parrama
Sydney, 2751
Australia
2 9685 9372 (Phone)

Nasser El-Kanj

American University of the Middle East (AUM) ( email )

250 St.
Block 3, Building 1
Egaila
Kuwait

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