Is It Worth to Include Bitcoin in Your Investment Portfolio? Risk-adjusted Returns Portfolio Optimization.
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Abstract
Digital transformation has altered the world in a way we have never experienced. The fintech introduces new products and services into the financial market. Bitcoin represents one of the milestone developments in digital assets. It is the first peer-to-peer electronic cash and is the flagship cryptocurrency with the largest market capitalization. Bitcoin has gained popularity as an alternative investment asset. This study aims to examine whether investors should include Bitcoin in their portfolios. The present paper contributes to the literature on cryptocurrencies by proposing asset allocation in an optimal portfolio. Optimal portfolios that include and exclude Bitcoin are estimated with Python SciPy to find the best feasible asset allocations that offer the maximum Sharpe ratio. The three optimal the portfolios are portfolio with Bitcoin, gold, and stocks, the portfolio with Bitcoin and stocks, and the portfolio with gold and stocks. The expected returns and risk of the estimated optimal portfolios are compared.
The findings suggest that Bitcoin provides significant diversification benefits when it is added to the portfolio of stocks and gold. The optimal portfolio that performs best in this study invests 13 percent in Bitcoin, 43 percent in gold, and 43 percent in stocks. The optimal portfolio that consists of Bitcoin, gold, and stock can offer superior returns at relatively the same level of volatility as the optimal portfolio that includes only gold and stock. The optimal portfolio that contains only gold and stock shows the lowest expected returns and the least volatility among the three optimal portfolios calculated. It is concluded that even though Bitcoin is highly volatile when considered as an individual asset when it is allocated together with gold and stock, the Sharpe ratio of the portfolio implies that the optimal portfolio delivers the best reward-to-variability.
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References
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