Diversifying Malaysia Portfolio With Digital Currency: Evidence With Bitcoin

Abstract

Digital currencies, despite its reputation of not being actual money by conventional definition, has found its way in the market. Although the initial issuer of digital currency like Bitcoin was not known and had no tie with central banks or any financial institutions, the digital currency is trending dynamically despite it being volatile. Many researchers found that its low correlation to stocks makes it a good complementary new financial instrument to be added to traditional assets such as stocks or gold. Owing to the reason, the objectives of this study are twofold; first, to observe the performance of the ‘new’ portfolio, and second, to examine the appropriate weight that should be allocated. Considering Bitcoins and conventional resources such as KLSE Index, Emas (gold), and oil price, this research used the return/risk and Sharpe ratio. It is found that a portfolio that combines Bitcoin, KLSE Index, Emas (gold), and oil performed well when the weight allocation for the digital currency is higher (in this context, 30 to 50 per cent). Also, by building an efficient frontier portfolio using the mean-CVaR approach, it is suggested that Bitcoins should be at a minimum of 3 per cent to ensure the portfolio is compensated by the appropriate return.