Using Bitcoin for Portfolio Diversification

Abstract

It has been an explosive start to 2024 in terms of the share market performance. Driven by a wave of enthusiasm for tech heavyweights like Meta and Nvidia, USA’s S&P 500 index of large American firms is up 5% and has crossed the 5,000 mark for the first time ever. On February 22, Japan's Nikkei 225 broke its own record – which it had established in 1989. In Australia, despite some volatility due to speculation on the direction of Reserve Bank interest rates, its share market also has boomed. Given such share market performance, this article asks if it is time to think about investing exclusively in shares. To answer this, the article will consider two fundamental questions that affect investors in capital markets: (1) what is meant by investment risk vs. return, and (2) can investors optimise their risk-return relationship by holding a single asset type (like stocks), or by holding a diversified portfolio of different asset classes? It will also consider a third question:(3) can using cryptocurrencies such as bitcoin help investors to better diversify their portfolio?