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Can Bitcoin Replace Gold in an Investment Portfolio?

Author

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  • Irene Henriques

    () (Schulich School of Business, York University, Toronto, ON M3J 1P3, Canada)

  • Perry Sadorsky

    () (Schulich School of Business, York University, Toronto, ON M3J 1P3, Canada)

Abstract

Bitcoin is an exciting new financial product that may be useful for inclusion in investment portfolios. This paper investigates the implications of replacing gold in an investment portfolio with bitcoin (“digital gold”). Our approach is to use several different multivariate GARCH models (dynamic conditional correlation (DCC), asymmetric DCC (ADCC), generalized orthogonal GARCH (GO-GARCH)) to estimate minimum variance equity portfolios. Both long and short portfolios are considered. An analysis of the economic value shows that risk-averse investors will be willing to pay a high performance fee to switch from a portfolio with gold to a portfolio with bitcoin. These results are robust to the inclusion of trading costs.

Suggested Citation

  • Irene Henriques & Perry Sadorsky, 2018. "Can Bitcoin Replace Gold in an Investment Portfolio?," Journal of Risk and Financial Management, MDPI, Open Access Journal, vol. 11(3), pages 1-19, August.
    • Handle: RePEc:gam:jjrfmx:v:11:y:2018:i:3:p:48-:d:163664
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    Cited by:

    1. Nikolaos A. Kyriazis, 2020. "Is Bitcoin Similar to Gold? An Integrated Overview of Empirical Findings," Journal of Risk and Financial Management, MDPI, Open Access Journal, vol. 13(5), pages 1-19, May.
    2. Gronwald, Marc, 2019. "Is Bitcoin a Commodity? On price jumps, demand shocks, and certainty of supply," Journal of International Money and Finance, Elsevier, vol. 97(C), pages 86-92.
    3. Ji, Qiang & Bouri, Elie & Roubaud, David & Kristoufek, Ladislav, 2019. "Information interdependence among energy, cryptocurrency and major commodity markets," Energy Economics, Elsevier, vol. 81(C), pages 1042-1055.
    4. Christian M. Hafner, 2020. "Alternative Assets and Cryptocurrencies," Journal of Risk and Financial Management, MDPI, Open Access Journal, vol. 13(1), pages 1-3, January.
    5. Anoop S Kumar & Taufeeq Ajaz, 2019. "Co-movement in crypto-currency markets: evidences from wavelet analysis," Financial Innovation, Springer;Southwestern University of Finance and Economics, vol. 5(1), pages 1-17, December.
    6. Serda Selin Ozturk, 2020. "Dynamic Connectedness between Bitcoin, Gold, and Crude Oil Volatilities and Returns," Journal of Risk and Financial Management, MDPI, Open Access Journal, vol. 13(11), pages 1-14, November.
    7. Chu, Jeffrey & Zhang, Yuanyuan & Chan, Stephen, 2019. "The adaptive market hypothesis in the high frequency cryptocurrency market," International Review of Financial Analysis, Elsevier, vol. 64(C), pages 221-231.

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    More about this item

    Keywords

    Bitcoin; gold; GARCH; portfolio modelling; risk management;
    All these keywords.

    JEL classification:

    • C - Mathematical and Quantitative Methods
    • E - Macroeconomics and Monetary Economics
    • F2 - International Economics - - International Factor Movements and International Business
    • F3 - International Economics - - International Finance
    • G - Financial Economics

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