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Bitcoin and Portfolio Diversification: A Portfolio Optimization Approach

Author

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  • Walid Bakry

    (School of Business, Western Sydney University, Sydney 2751, Australia
    Current address: Locked Bag 1797, Penrith 2751, Australia.)

  • Audil Rashid

    (College of Business Administration, American University of the Middle East, Eqaila 54200, Kuwait)

  • Somar Al-Mohamad

    (College of Business Administration, American University of the Middle East, Eqaila 54200, Kuwait)

  • Nasser El-Kanj

    (College of Business Administration, American University of the Middle East, Eqaila 54200, Kuwait)

Abstract

This study investigates the performance of Bitcoin as a diversifier under different constraining portfolio optimization frameworks. The study employs different constraining optimization frameworks that seek to maximize risk-adjusted returns (Sharpe ratio) of the portfolio by optimizing allocations to each asset class (asset allocation). The performance attributes are evaluated by comparing the portfolios both with and without Bitcoin under frameworks ranging from equal-weighted, risk-parity, and semi-constrained to unconstrained. This study suggests that Bitcoin, due to its exotic nature, unwavering appeal, and unknown set of drivers, could act as a diversifier in normal market conditions, and it might also have some borderline hedge to safe haven properties. The results further suggest that while Bitcoin may be a potential diversifier for a risk-seeking investor, the risk-averse investor must exercise caution by limiting their exposure to Bitcoin in their portfolios, as unnecessary exposure may increase the probability of losses in extreme market conditions.

Suggested Citation

  • Walid Bakry & Audil Rashid & Somar Al-Mohamad & Nasser El-Kanj, 2021. "Bitcoin and Portfolio Diversification: A Portfolio Optimization Approach," JRFM, MDPI, vol. 14(7), pages 1-24, June.
    • Handle: RePEc:gam:jjrfmx:v:14:y:2021:i:7:p:282-:d:579498
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    References listed on IDEAS

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    Cited by:

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