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Caveat Emptor: Does Bitcoin Improve Portfolio Diversification?

Gasser, Stephan and Eisl, Alexander and Weinmayer, Karl (2014) Caveat Emptor: Does Bitcoin Improve Portfolio Diversification? WU Vienna University of Economics and Business, Vienna. (Unpublished)

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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 a 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 return-risk ratios.

Item Type: Paper
Keywords: Bitcoin / Portfolio Optimization / Conditional Value at Risk / Virtual Currencies
Classification Codes: JEL G11, G15, F31
Divisions: Departments > Finance, Accounting and Statistics > Finance, Banking and Insurance
Depositing User: Stephan Gasser
Date Deposited: 04 Nov 2015 15:22
Last Modified: 22 May 2017 18:51
FIDES Link: https://bach.wu.ac.at/d/research/results/68801/
URI: http://epub.wu.ac.at/id/eprint/4674

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