Cryptocurrencies as an Asset Class — Holding Bitcoin in German Equities Portfolios

Abstract

We examine the diversification benefits and hedging abilities of cryptocurrencies like Bitcoin for German stock market investors. From an economic perspective, we interpret cryptocurrencies as an additional asset class and incorporate Bitcoin into portfolios of equities. Using German stock market data and Bitcoin data from January 2012 to December 2020, we yearly add Bitcoin to different long equities portfolios and apply performance and risk measures on them. Further, we use Bitcoin for hedging equities differing positive and negative stock market movements. Our results show improved performances of equities-Bitcoin portfolios over equities-only portfolios but limited properties of Bitcoin as a means to absorb market downturns, suggesting that Bitcoin can provide substantially enhanced portfolio risk-return exposures, but is constrained efficient as a hedge to the stock market.