Bitcoin as a financial asset : impact of Bitcoin on a well-diversified European portfolio

The purpose of this paper is to analyse Bitcoin as a financial asset and more precisely to analyse the impact of Bitcoin on a well-diversified European portfolio with data covering the time span 2014 to 2017. Markowitz’s Modern Portfolio theory is used to compare the risk-return of optimal portfolios including and excluding Bitcoin, from the point of view of a European investor. Bitcoin is added to three portfolios: an equally weighted portfolio, a long-selling-only portfolio and a portfolio that allows short-selling. The main results are that the risk-return of an equally weighted portfolio improves when adding Bitcoin and that adding approximately 2% of Bitcoin to a well-diversified European portfolio increases the Sharpe ratio dramatically in both the short-selling and long-selling portfolio. Our results will have an impact on how to invest using Bitcoin as well as how Bitcoin can be perceived by regulatory institutions.