Digital Currency Risk

Abstract

Digital currencies, such as Bitcoin, have emerged as an alternative form of money, untethered to traditional money and largely unregulated. As such, digital currency represents a wild frontier for investors who might otherwise be shopping for gold or foreign currencies, with serious risks. The present work considers digital currency from a traditional asset pricing perspective. Setting aside risks of seller fraud or currency theft, we examine fluctuation and systematic risk in the price of Bitcoin. From this perspective, Bitcoin does not appear to carry much systematic risk -- despite its high volatility -- and so is a reasonable candidate for inclusion in investors’ portfolios. Some illustrative examples suggest that the optimal amount of Bitcoin to include in investor portfolios may be tiny or instead substantial - as high as 21 percent of total financial assets.