Bitcoin’s Financial Risk Properties in a Global Portfolio

Abstract

In this thesis the dynamic between Bitcoin and a selection of various financial assets is analyzed to examine whether Bitcoin offers diversification, hedging and safe haven properties for risk management benefits in a global market portfolio. A dynamic conditional correlation model is used to obtain the co-movement between the assets. Optimizing portfolios by including Bitcoin is done to examine what the inclusion does for the portfolio properties. Lastly, Value at risk (VaR) is estimated to see whether including Bitcoin in a portfolio can lower the VaR.

The conditional correlation coefficients for Bitcoin against the other assets for all sample periods investigated shows correlation coefficients around zero. In addition, the analysis of volatility spillovers between the selected markets implies that there is no significant contagion between the markets and for these reasons, Bitcoin exhibits effective diversification properties. This is also supported by the analysis of MVF and CML. The MVF and CML shows that portfolios including Bitcoin make it possible to obtain the same expected return, but for a lower risk. The VaR analysis shows that a including a Bitcoin weight between 0.0-5.0% lowers the VaR, despite Bitcoin’s high volatility.

Finally, the near zero conditional correlation coefficients between Bitcoin and the other assets also imply that Bitcoin does not exhibit hedging properties. Bitcoin is also considered as a weak safe haven as it is uncorrelated with the other markets during market turmoil.