The Economic Value of Bitcoin: A Volatility Timing Perspective with Portfolio Rebalancing

Abstract

Based on the volatility timing framework, this study uses intraday futures contracts (Bitcoin, gold, E-mini S&P 500, and 10-year T-Note) to investigate the economic value of adding Bitcoin instead of gold to a traditional financial portfolio. More important, we analyze the role of rebalancing strategies on portfolio performance when transaction costs are considered. Our results show that Bitcoin improves the performance of a stock-bond portfolio. Specifically, when our proposed rebalancing strategies are implemented, the minimum volatility portfolio with Bitcoin outperforms that with gold. We show that it is crucial to consider transaction costs when evaluating the performance of rebalancing strategies.

Keywords: Bitcoin, Volatility timing, realized volatility, Portfolio rebalancing, RGARCH