Skip to main content

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

Bitcoin 3406638 1920

A working paper by Dr Andrew Urquhart, in collaboration with Emmanouil Platanakis of the University of Bath, examines whether investors should include Bitcoin in their portfolio. Including alternative investments in traditional portfolios has been an area of some debate in recent years, with some studies indicating that they add value (for instance Conover et al 2010; Gao and Nardari 2018), while some find that alternative investments offer no benefit to investors (for instance Daskalaki and Skiadopoulos 2011; Bessler and Wolff 2015).

In this paper, the authors employ eight popular asset allocation strategies to assess the out-of-sample benefits from holding some Bitcoin in a traditional stock-bond portfolio. They show that across all competing asset allocation strategies and levels of risk aversions, the benefits of including Bitcoin are quite considerable with substantially higher risk-adjusted returns. The authors also show that their results are robust to alternative estimation windows, the incorporation of transaction costs, the inclusion of commodities in the portfolio, and two additional portfolio optimization techniques that incorporate higher moments.

Since it was first proposed by Nakamoto in 2008, Bitcoin has received lots of attention from investors, the media and regulators. Bitcoin is the most popular cryptocurrency in terms of trading volume and is a peer-to-peer electronic cash system which allows online payments to be sent directly from one party to another without relying on a financial institution. Therefore, unlike the vast majority of other financial assets, Bitcoin has no association with any higher authority, such as a government, firm, country or commodity. Bitcoin also has no physical representation and its value is based on the security of an algorithm which is able to trace all transactions between buyers and sellers. The attention received is due to its low transaction costs, peer-to-peer system and governmental free design. This has led to a surge in trading volume, volatility and price, with cryptocurrencies regularly appearing in the mainstream news.

Therefore this research adds to the growing literature of cryptocurrencies by showing that Bitcoin is an attractive proposition for investors and should be considered by portfolio managers. The full working paper can be found at: https://ssrn.com/abstract=3215321.

Interested in Finance and FinTech? Find out more about our new MSc programme here.

Find out more about Dr Andrew Urquhart's research.

View Profile

Published 12 November 2018
Topics:
Research news

You might also like

Henley Business School among the best in the Complete University Guide Rankings 2015

19 May 2014
This year’s ranking sees another successful set of results for Henley Business School, with good improvements and a top 20 position across Henley Business School range of programmes for accounting, finance, business and management, real estate and planning.
Rankings news

Meet the Tutor event a success

18 October 2012
Another annual event took place at the ICMA Centre recently to help new and returning students to settle back into university life.

ICMA Centre Doctoral Researcher Heads to Portugal

25 May 2011
ICMA Centre PhD student Christos F. Mavrovitis will be presenting a working paper in Portugal this June. Firstly, Mr. Mavrovitis will be attending the 2011 FMA Annual European Meeting in Porto on June 8 before travelling to Braga for the 2011 EFMA Annual Meeting from June 22.