The Economic Value of Bitcoin: A Portfolio Analysis of Currencies, Gold, Oil and Stocks

Abstract

We assess the out-of-sample performance of Bitcoin within portfolios of various asset classes and a well-diversified portfolio employing standard metrics under four strategies. Most importantly, we show the value-added net of transaction costs. Our findings suggest significant diversification benefits from Bitcoin within traditional and alternative asset portfolios that are not offset by its high volatility. We provide evidence that the low correlation of Bitcoin can also lead to significant reduction of the overall portfolio risk, most apparent in portfolios of commodities. Accounting for time-variant relationships between assets, we find a higher contribution of Bitcoin, though, the economic gains of this strategy are suppressed due to increased transaction costs. Considering non-bubble conditions that are not marked by explosive prices in cryptocurrencies, we document substantially diminished benefits. In contrast to previous studies, Bitcoin pays off little if investors accommodate a battery of economic instruments.