Can Bitcoin Replace Gold in an Investment Portfolio?

Irene Henriques and Perry Sadorsky
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Irene Henriques: Schulich School of Business, York University, Toronto, ON M3J 1P3, Canada
Perry Sadorsky: Schulich School of Business, York University, Toronto, ON M3J 1P3, Canada

JRFM, 2018, vol. 11, issue 3, 1-19

Abstract: Bitcoin is an exciting new financial product that may be useful for inclusion in investment portfolios. This paper investigates the implications of replacing gold in an investment portfolio with bitcoin (“digital gold”). Our approach is to use several different multivariate GARCH models (dynamic conditional correlation (DCC), asymmetric DCC (ADCC), generalized orthogonal GARCH (GO-GARCH)) to estimate minimum variance equity portfolios. Both long and short portfolios are considered. An analysis of the economic value shows that risk-averse investors will be willing to pay a high performance fee to switch from a portfolio with gold to a portfolio with bitcoin. These results are robust to the inclusion of trading costs.

Keywords: Bitcoin; gold; GARCH; portfolio modelling; risk management (search for similar items in EconPapers)
JEL-codes: C E F2 F3 G (search for similar items in EconPapers)
Date: 2018
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (18)

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