Advanced

Bitcoin: The New Digital Gold?

Razo Mendoza, Kathery Angelica LU (2018) NEKN02 20181
Department of Economics
Abstract
Bitcoin has become a mainstream in the financial world. It has several similarities with Gold as low correlation with stocks, inflation hedge, government decentralization and the no currency attachment. Therefore, the name of the new “Digital Gold”. This study compares Gold and Bitcoin, offered as an alternatives financial assets. Thus, there are two research questions. First, if Bitcoin helps to reduce risk within a well-diversified equity portfolio, represented by the S&P 500. Second, if Bitcoin improves risk-return relation. Both questions are compared with Gold. Hence, two the financial approaches are the Minimum Portfolio Variance and the Tangency Portfolio. In order to have a solid base, this study evaluates in-sample and out-sample... (More)
Bitcoin has become a mainstream in the financial world. It has several similarities with Gold as low correlation with stocks, inflation hedge, government decentralization and the no currency attachment. Therefore, the name of the new “Digital Gold”. This study compares Gold and Bitcoin, offered as an alternatives financial assets. Thus, there are two research questions. First, if Bitcoin helps to reduce risk within a well-diversified equity portfolio, represented by the S&P 500. Second, if Bitcoin improves risk-return relation. Both questions are compared with Gold. Hence, two the financial approaches are the Minimum Portfolio Variance and the Tangency Portfolio. In order to have a solid base, this study evaluates in-sample and out-sample portfolios of rolling windows for 3, 6 and 12 months horizons. The results of the first question suggest that even the correlation coefficients are extremely low, they are not enough to mitigate risk because of Bitcoin high volatility. The in-sample and out-sample analysis demonstrate Bitcoin does not help to reduce risk in an equity portfolio as Gold does. For the second question, Bitcoin offers a better risk premium than Gold for in-sample and out-sample and considering both frameworks: long and long-short. However, Gold still gives a high premium per unit of risk. Therefore, Gold is also a good investment asset. Hence, even the similarities between both assets, Bitcoin cannot be considered as the new “Digital Gold” because it is still in the infancy stage to be treated as Gold. (Less)
Please use this url to cite or link to this publication:
author
Razo Mendoza, Kathery Angelica LU
supervisor
organization
course
NEKN02 20181
year
type
H1 - Master's Degree (One Year)
subject
keywords
Bitcoin, Gold, Digital Gold, Minimum Variance Portfolio, Tangency Portfolio, In-sample and out-sample portfolios.
language
English
id
8945956
date added to LUP
2018-07-02 15:40:28
date last changed
2018-07-02 15:40:28
@misc{8945956,
  abstract     = {Bitcoin has become a mainstream in the financial world. It has several similarities with Gold as low correlation with stocks, inflation hedge, government decentralization and the no currency attachment. Therefore, the name of the new “Digital Gold”. This study compares Gold and Bitcoin, offered as an alternatives financial assets. Thus, there are two research questions. First, if Bitcoin helps to reduce risk within a well-diversified equity portfolio, represented by the S&P 500. Second, if Bitcoin improves risk-return relation. Both questions are compared with Gold. Hence, two the financial approaches are the Minimum Portfolio Variance and the Tangency Portfolio. In order to have a solid base, this study evaluates in-sample and out-sample portfolios of rolling windows for 3, 6 and 12 months horizons. The results of the first question suggest that even the correlation coefficients are extremely low, they are not enough to mitigate risk because of Bitcoin high volatility. The in-sample and out-sample analysis demonstrate Bitcoin does not help to reduce risk in an equity portfolio as Gold does. For the second question, Bitcoin offers a better risk premium than Gold for in-sample and out-sample and considering both frameworks: long and long-short. However, Gold still gives a high premium per unit of risk. Therefore, Gold is also a good investment asset. Hence, even the similarities between both assets, Bitcoin cannot be considered as the new “Digital Gold” because it is still in the infancy stage to be treated as Gold.},
  author       = {Razo Mendoza, Kathery Angelica},
  keyword      = {Bitcoin,Gold,Digital Gold,Minimum Variance Portfolio,Tangency Portfolio,In-sample and out-sample portfolios.},
  language     = {eng},
  note         = {Student Paper},
  title        = {Bitcoin: The New Digital Gold?},
  year         = {2018},
}