Abstract
The objective of this study is to provide empirical documentation on the risk-adjusted performance of portfolios formed by investing in a Cryptocurrency such as Bitcoin and a risk-free asset. The study evaluates the performance of these Bitcoin-spiked portfolios using statistical measures grounded in modern portfolio theory. Market returns are adjusted for the degree of total risk, systematic risk, and downside risk inherent in each portfolio, and the securities are then ranked on the basis of risk-adjusted performance. In addition to standard Sharpe, Jensen, and Treynor performance measures, two newer evaluation metrics, the Modigliani and Sortino measures, are used for ranking the portfolios. We report that these portfolios have varying levels of risk and return. Our key finding is that these portfolios’ risk-adjusted returns are not only quite impressive but also exceed that of S&P 500, our benchmark market portfolio. The implication of our results is that investors with higher risk tolerance could earn substantially higher returns by including a larger percentage of Bitcoin in their portfolios. Our results should be informative to individual and institutional investors contemplating investing in cryptocurrencies but aware of their high risk.
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