Bitcoin and Portfolio Diversification: Evidence from India

Abstract

Achievement of diversification gains is one of the most important objectives of portfolio optimization. We aim to ascertain the magnitude and robustness of diversification gains for an already diversified portfolio due to inclusion of Bitcoin from the standpoint of an Indian investor. We use eight indices to build a portfolio spread across six asset classes, namely, equity, fixed income, commodities, real estate, gold and alternative investments. All asset classes except alternative investments are represented by indices which track performance of respective assets in India. We employ three investment strategies, namely, ‘long only’, ‘constrained’ and ‘equally weighted’ to construct optimal portfolios. Instead of the traditional mean-variance optimization methodology, we apply mean-CVaR approach for optimal allocation of weights to assets. Our findings suggest that portfolios containing Bitcoin have superior risk-adjusted returns as compared to portfolios without Bitcoin for two strategies, ‘long only’ and ‘equally weighted’. Results suggest relatively stable weights across the investment horizon for Bitcoin in ‘long only’ strategy as compared to ‘constrained’ framework. The findings are relevant for institutional and retail investors looking to earn higher risk-adjusted returns for a portfolio denominated in Indian rupee. The study highlights the immense potential of Bitcoin as an investment alternative and also adds fresh evidence to the scarce literature on Bitcoin from a financial perspective.