Bitcoin in portfolio diversification: The perspective of a global investor

Abstract

This paper examines whether it is advisable to include some portion of Bitcoin in a portfolio of traditional financial assets. The goal is to explore whether Bitcoin could be a good source of diversification from the perspective of a global investor. Two portfolios have been created for this purpose: a portfolio aimed at minimizing risk and a portfolio designated as "aggressive" that offers higher rates of daily return but also a higher risk. Portfolios were created using Markowitz's optimization theory and included traditional instruments (stocks, bonds, gold) and Bitcoin. In portfolio optimization, high-frequency data (daily data) were used. The analysed period is from the end of July 2010 to the end of June 2019, which is the period of active Bitcoin trading. The results show that Bitcoin could be a good source of diversification for a portfolio that consists of traditional financial instruments, for investors trading daily. It could be a good source of diversification for the risk-averse investor and those investors who have a higher risk appetite. Considering the high volatility of Bitcoin, the investors should be very careful when they decide to include Bitcoin in a portfolio.