The Impact of Bitcoin and Gold in the Portfolio — A Research Based on Copula

Abstract

Gold and cryptocurrencies play an important role in portfolios, especially in risk management. Due to the special nature of these financial products, people usually add a small amount of gold or cryptocurrencies to the origin portfolio to balance return and risk. This article takes Bitcoin as the representative of cryptocurrencies to analyze the different impacts of Bitcoin and gold in the portfolio. This article employs copula functions to fit the Value-at-Risk, Conditional Value-at-Risk, mean return, and Sharpe ratio. Value-at-Risk and Conditional Value-at-Risk are used to measure the portfolio's risk. In addition, mean return and Sharpe ratio are used to measure the returns. Empirical results demonstrate that gold and Bitcoin can both serve as hedging assets; Bitcoin can enhance portfolio returns, while gold might lead to a decrease in portfolio returns. This result offers a reference on the asset allocation to investors. Adding an appropriate proportion of gold and Bitcoin can optimize the portfolio’s risk-return profile.