Does Bitcoin Offer Diversification Benefit in a Portfolio

Abstract

Bitcoin is a cryptocurrency that is gaining popularity over the years. It can generate a significant amount of return while having a high volatility. Given the high risk, high return nature of Bitcoin, the study aimed at determining whether Bitcoin offers diversification benefit in a portfolio. Two characteristics of Bitcoin (correlation and volatility) were examined, and optimal portfolio analysis was conducted using different weights of Bitcoin. The study showed that Bitcoin's low correlations with most securities and assets in the market help diversify portfolios, but the currency's high volatility indicates that only a small amount of Bitcoin should be included in portfolio diversification.