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Virtual Currency, Tangible Return: Portfolio Diversification with Bitcoin

Author

Listed:
  • Marie Brière

    (LEDa - Laboratoire d'Economie de Dauphine - Université Paris Dauphine-PSL - PSL - Université Paris Sciences et Lettres)

  • Kim Oosterlinck

    (ULB - Université libre de Bruxelles)

  • Ariane Szafarz

    (Dulbéa - Département d'économie appliquée de l'université libre de Bruxelles - ULB - Université libre de Bruxelles, ULB - Université libre de Bruxelles, Centre Emile Bernheim - ULB - Université libre de Bruxelles - SBS-EM, CERMi - Centre for European Research in Microfinance)

Abstract

Bitcoin (BTC) is a major virtual currency. Using weekly data over the 2010–2013 period, we analyze a BTC investment from the standpoint of a US investor with a diversified portfolio including both traditional assets (worldwide stocks, bonds, hard currencies) and alternative investments (commodities, hedge funds, real estate). Over the period under consideration, BTC investment had highly distinctive features, including exceptionally high average return and volatility. Its correlation with other assets was remarkably low. Spanning tests confirm that BTC investment offers significant diversification benefits. We show that the inclusion of even a small proportion of BTCs may dramatically improve the risk-return trade-off of well-diversified portfolios. Results should however be taken with caution as the data may reflect early-stage behavior that may not last in the medium or long run.

Suggested Citation

  • Marie Brière & Kim Oosterlinck & Ariane Szafarz, 2015. "Virtual Currency, Tangible Return: Portfolio Diversification with Bitcoin," Post-Print hal-02315410, HAL.
    • Handle: RePEc:hal:journl:hal-02315410
    DOI: 10.1057/jam.2015.5
    as

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    JEL classification:

    • G11 - Financial Economics - - General Financial Markets - - - Portfolio Choice; Investment Decisions
    • G15 - Financial Economics - - General Financial Markets - - - International Financial Markets
    • O16 - Economic Development, Innovation, Technological Change, and Growth - - Economic Development - - - Financial Markets; Saving and Capital Investment; Corporate Finance and Governance
    • F39 - International Economics - - International Finance - - - Other
    • G10 - Financial Economics - - General Financial Markets - - - General (includes Measurement and Data)
    • E44 - Macroeconomics and Monetary Economics - - Money and Interest Rates - - - Financial Markets and the Macroeconomy

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