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Bitcoin and Portfolio Diversification: Portfolio Optimization Approach

Authors: Walid Bakry; Audil Rashid; Somar Al-Mohamad; Nasser El-Kanj;

Bitcoin and Portfolio Diversification: Portfolio Optimization Approach

Abstract

This study investigates the performance of Bitcoin as a diversifier under different constraining portfolio optimization frameworks. The study employs different constraining optimization frameworks that seek to maximize risk-adjusted returns (Sharpe ratio) of the portfolio by optimizing allocations to each asset class (asset allocation). The performance attributes are evaluated by comparing the portfolios both with and without Bitcoin under frameworks ranging from equal-weighted, risk-parity, and semi-constrained to unconstrained. This study suggests that Bitcoin, due to its exotic nature, unwavering appeal, and unknown set of drivers, could act as a diversifier in normal market conditions, and it might also have some borderline hedge to safe haven properties. The results further suggest that while Bitcoin may be a potential diversifier for a risk-seeking investor, the risk-averse investor must exercise caution by limiting their exposure to Bitcoin in their portfolios, as unnecessary exposure may increase the probability of losses in extreme market conditions.

Keywords

portfolio diversification, ddc:330, G15, 350202 - Finance, C58, 280108 - Expanding knowledge in economics, G11, cryptocurrencies, portfolio optimization, Bitcoin

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selected citations
These citations are derived from selected sources.
This is an alternative to the "Influence" indicator, which also reflects the overall/total impact of an article in the research community at large, based on the underlying citation network (diachronically).
BIP!Citations provided by BIP!
popularity
This indicator reflects the "current" impact/attention (the "hype") of an article in the research community at large, based on the underlying citation network.
BIP!Popularity provided by BIP!
influence
This indicator reflects the overall/total impact of an article in the research community at large, based on the underlying citation network (diachronically).
BIP!Influence provided by BIP!
impulse
This indicator reflects the initial momentum of an article directly after its publication, based on the underlying citation network.
BIP!Impulse provided by BIP!
38
Top 10%
Top 10%
Top 10%
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gold