Should investors include Bitcoin in their portfolios? A portfolio theory approach

By Emmanouil Platanakis, Andrew Urquhart. The British Accounting Review, 2020

215 citations recorded by the source corpus.

Many papers in recent years have examined the benefits of adding alternative assets to traditional portfolios containing stocks and bonds. Bitcoin has emerged as a new alternative investment for investors which has attracted much attention from the media and investors alike. However relatively little is known about the investment benefits of Bitcoin and therefore this paper examines the benefit of including Bitcoin in a traditional benchmark portfolio of stocks and bonds. Specially, we employ data up to June 2018 and analyse the potential out-of-sample portfolio benefits resulting from including Bitcoin in a stock-bond portfolio for a range of eight popular asset allocation strategies. The out-of-sample analysis shows that, across all different asset allocation strategies and risk aversions, the benefits of Bitcoin are quite considerable with substantially higher risk-adjusted returns. Our results are robust to rolling estimation windows, the incorporation of transaction costs, the inclusion of a commodity portfolio, alternative indices, short-selling as well as two additional optimization techniques including higher moments with (and without) variance-based constraints (VBCs). Therefore, our results suggest that investors should include Bitcoin in their portfolio as it generates substantial higher risk-adjusted returns.

Subfields: Economics and Econometrics, Finance, Information Systems

View Paper: https://www.semanticscholar.org/paper/b04e2d7cd0f4deac21b07b603c0bb994489afa61

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Citations in the corpus

Portfolio management with cryptocurrencies: The role of estimation risk (2019, background): “…exchange.1 The diversification benefits of Bitcoin to other financial assets has been reported by Bouri et al (2017) and Corbet et al (2018a), while recently Kajtazi and Moro (2018) and Platanakis and Urquhart (2018) both report substantial benefits from including Bitcoin in traditional portfolios.”
Is Bitcoin a hedge or safe haven for currencies? An intraday analysis (2019, unknown): “Recently, Platanakis and Urquhart (2019) show that the inclusion of Bitcoin in a simple stock bond portfolio significantly improves the risk-return metrics, even when Bitcoin experiences negative returns.”
Forecasting the volatility of Bitcoin: The importance of jumps and structural breaks (2020, unknown): “There is a growing evidence that Bitcoin offers substantial diversification to investors when included in portfolios (Kajtazi and Moro 2019; Platanakis and Urquhart 2019) and that technical trading rules generate signficiant returns to investors (Hudson and Urquhart 2019).”