Bitcoin and Investment Portfolios

Abstract

This chapter explores the question whether Bitcoin as an unregulated cryptocurrency can have a positive effect on already well-diversified investment portfolios. Bitcoin was originally introduced in 2008 in a paper titled ``Bitcoin: A Peer-to-Peer Electronic Cash System''. Since then, Bitcoin has seen increasing trading volumes (as well as major capital gains and losses) in a high-volatility environment while also experiencing growing attention by regulators, academics, the media and the general public. At the same time, more and more online and offline businesses worldwide started to adopt Bitcoin as an alternative means of payment, even though Bitcoin does not have legal tender status. Today, Bitcoin is still the most popular unregulated cryptocurrency. Bitcoin's share of the total market capitalization of all cryptocurrencies currently amounts to just under 45% according to Coinmarketcap (2018), and Bitcoin is also the top-searched cryptocurrency of the top five cryptocurrencies in terms of market capitalization (Google Trends 2018). This is largely due to the fact that Bitcoin was the first cryptocurrency based on a decentralized peer-to-peer network (to confirm transactions and generate a limited amount of new Bitcoins in doing so) and functioning without the backing of a central bank or any other monitoring authority. For the general public and most media outlets, Bitcoin is still seen as the leading cryptocurrency.