THE ASSET CLASS OF BITCOIN AND ITS CONTRIBUTIONS TO INVESTMENT PORTFOLIOS

This study investigates the asset class and portfolio contributions of Bitcoin, using monthly returns for eight years after it had matured into an investable asset. Bitcoin displays a unique return distribution and offers a distinctive risk-return profile compared to five other major asset classes....

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Bibliographic Details
Published inJournal of business and accounting Vol. 15; no. 1; pp. 3 - 19
Main Author Mukherji, Sandip
Format Journal Article
LanguageEnglish
Published San Diego American Society of Business and Behavioral Sciences 01.10.2022
Subjects
American dollar
Bond portfolios
Digital currencies
Foreign exchange markets
Foreign exchange rates
Futures trading
Investments
Portfolio investments
Stocks
Volatility
United States > US
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Summary:This study investigates the asset class and portfolio contributions of Bitcoin, using monthly returns for eight years after it had matured into an investable asset. Bitcoin displays a unique return distribution and offers a distinctive risk-return profile compared to five other major asset classes. Bitcoin delivered by far the highest returns with the greatest volatility, and its Sharpe ratio was lower only than stocks. Although Bitcoin had the most extreme returns, it was the only asset with highly positively skewed returns. It provided the highest Sortino and upside potential ratios, reflecting its high risk-premiums and average upside returns relative to downside risk. Bitcoin's uniqueness as an asset was substantiated by its low correlations with other assets, which had very little explanatory power for its returns. Bitcoin's uniqueness as an asset was substantiated by its low correlations with other assets, which had very little explanatory power for its returns. Not surprisingly, Bitcoin played a valuable role in enhancing the risk-return tradeoffs of investment portfolios. A modest Bitcoin allocation boosted the Sharpe ratio of a stock portfolio far more than much larger allocations of gold or bonds. Optimizing a portfolio of stocks and bonds with a small Bitcoin weight considerably increased the Sharpe ratio, whereas an optimization with gold barely affected the Sharpe ratio. Stock and stock-bond portfolios optimized with Bitcoin also provided higher risk-premiums and average upside returns compared to downside risk, producing higher Sortino and upside potential ratios, than portfolios optimized with gold.
ISSN:1944-2874
2153-6252