After analyzing a portfolio with and without bitcoin, a study says the “robustness check confirms the findings and also advocates for the cryptocurrency to be added to the portfolio.”
The study by economists at Warsaw University says “we want to verify if an inclusion of Bitcoin into the portfolio consisting of different market assets moves the efficient frontier… We check if Bitcoin is able to gain some substantial weight and improves the risk-return profile of the whole portfolio.”
They say “the empirical analysis is based on the comparison of the portfolios with and without Bitcoin in the context of two Markowitz criteria of optimization.
We track the behavior of the portfolio consisting of 10 traditional assets
(representing equity, fixed income, money market, commodities, real estate markets) over a certain period of time. Then we add to it Bitcoin and look at the performance measures…
The historical observations cover the period from 1.05.2013 to 24.05.2019 providing us with 73 months of daily prices of 11 assets.”
In line with numerous studies they firstly find that bitcoin does not correlate with other assets, making it a portfolio diversifier.
After much analysis they then conclude that “including Bitcoin in the portfolio indeed improves its efficiency.”
“The bitcoin-inclusive portfolios perform better than those consisting solely of traditional assets,” they say, adding:
“The findings are robust in regard to the different optimization criteria in our study – expected mean return maximization and expected shortfall (CVaR) minimization.
Adding bitcoin to Markowitz-optimized portfolios as well as to an equally weighted one improves their performance.”
The results are strong enough for these economists to recommend the inclusion of bitcoin in an investment portfolio.
While another study found that bitcoin is a hedge against oil, making that a very new one, although this oil hedge study does not seem to have gone through peer review.
These are just the latest studies adding to an academic corpus on bitcoin with different methods of analysis still leading to the same results: bitcoin is a diversifier and increases risk adjusted returns.
The conclusion of these studies has partially been the foundation of the entrance of institutional investors, but their adoption has been somewhat small scale, with pension funds for example still not quite incorporating bitcoin in their investment strategies.
However as these academic foundations continue to be built, financial advisers may move more and more towards recommending the addition of bitcoin in investment portfolios so as to increase risk adjusted returns.