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Should people invest in Bitcoin?
- 1 College of Art and Science, Vanderbilt University, 2301 Vanderbilt Place, Nashille, TN, USA
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Abstract
I analyzed the historical performance of Bitcoin using its daily price data from October 2017 to January 2023, focusing on its unique characteristics and risk-return profile. The analysis began with an in-depth examination of Bitcoin's metrics, emphasizing factors such as maximum drawdown (MaxDD), a key measure of risk, and volatility, which highlights the asset's price fluctuations. Next, I extended the analysis to include four additional assets: GLD (gold), SPY (SPDR S&P 500 ETF Trust), DXY (U.S. dollar index), and QQQ (Invesco QQQ Trust). I evaluated these assets using metrics such as average return, volatility, Sharpe ratio, and maximum drawdown, comparing them directly to Bitcoin. This comparison revealed the relative strengths and weaknesses of Bitcoin against traditional and alternative assets, highlighting its potential for high returns at the cost of elevated risk and drawdowns. Following this, I constructed a portfolio of all five assets, optimizing for the highest Sharpe ratio, which balances return and risk. The analysis delved into why this specific asset combination produced the most optimal Sharpe ratio, considering factors like asset correlations and individual contributions to the portfolio's risk-return tradeoff. To further understand Bitcoin's role, I compared the optimized portfolio with and without Bitcoin, evaluating differences in Sharpe ratio, return, and volatility. This analysis underscored the conditional value of including Bitcoin, as its contribution depends on an investor’s risk tolerance and market conditions. Ultimately, I concluded that Bitcoin can be a worthwhile investment, but only under specific conditions where its high risk is offset by its potential for outsized returns and diversification benefits.
Keywords
cryptocurrency, portfolio diversification, portfolio management, performance evaluation
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Cite this article
Xu,S. (2025). Should people invest in Bitcoin?. Journal of Applied Economics and Policy Studies,16,41-51.
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