Yesterday, we discussed whether Bitcoin could be a safe asset and/or a hedge. We concluded that, perhaps, Bitcoin is only a useful way to diversify portfolios. We need empirical evidence to corroborate this hypothesis. Marie Brière, Kim Oosterlinck and Ariane Szafarz (Centre Emile Bernheirm) in their 2019 paper entitled ‘Virtual Currency, Tangible Return: Portfolio Diversification with Bitcoin’ provided some evidence and discovered that Bitcoin offers indeed diversification advantages.
More in details, by using weekly data over the 2010-2013 period, they analyzed a Bitcoin investment from the standpoint of a U.S. investor with a diversified portfolio including both traditional assets (worldwide stocks, bonds, hard currencies) and alternative investments (commodities, hedge funds, real estate). They concluded that ‘over the period under consideration, Bitcoin investment had highly distinctive features, including exceptionally high average return and volatility. Its correlation with other assets was remarkably low’.
Furthermore, they also discovered that ‘spanning tests confirm that Bitcoin investment offers significant diversification benefits’ and that ‘the inclusion of even a small proportion of Bitcoins may dramatically improve the risk-return trade-off of well-diversified portfolios’. A very good result indeed for traders. Nevertheless, the three researchers also warned that results should be taken with caution as the data may reflect early-stage behavior which may not last in the medium or long run.