Bitcoin: The biggest financial innovation of fourth industrial revolution and a portfolio's efficiency booster

• Published in: Technological forecasting & social change 2021-01, Vol.162, p.120383, Article 120383
• Main Authors: Li, Jing-Ping, Naqvi, Bushra, Rizvi, Syed Kumail Abbas, Chang, Hsu-Ling
• Format: Article
• Language: English
• Subjects: Bitcoin; Business schools; Digital currencies; Economic development; Economic growth; Efficiency; Efficient frontier; Financial markets; Financing; Industrialization; Industry 4.0; Innovation; Innovations; Investment analysis; Investments; Mean-variance; Optimization; Sharpe ratio; Stability analysis; Technology
• ISSN: 0040-1625; 1873-5509
• DOI: 10.1016/j.techfore.2020.120383

•Bitcoin shifts the efficient frontier upwards for a sophisticated US investor.•Bitcoin contributes to returns and brings reasonable improvement in sharpe ratio.•Bitcoin offers larger gains in a portfolio when short selling is allowed.•Bitcoin's weight in a portfolio increases with an increase in target risk.•The study provides a long-term perspective on bitcoin's diversification potential. Fourth industrial revolution has brought with it a consistently growing use of technology in all fields of life, including finance and investment. Amidst all this, Bitcoin also emerged on the surface of the financial markets in 2008, as one of the biggest innovations of our century. However, since then, it has largely been scrutinized for the benefits and risks that it puts forth in terms of the economic growth, financial system's stability and the welfare of overall society. In this study, we evaluate how the financial industry can use Bitcoin for improving the efficiency and wealth of the society, by focusing on portfolio optimization. Our results show that Bitcoin has an enormous tendency to improve an investor's risk-return profile. This efficiency is clearly visible in the upward shifts of the efficient frontiers, once Bitcoin is added in the universe of investable assets. Bitcoin's efficiency is valid for when the short selling was, and, was not restricted. It is important to note that our findings are based on the data that spans over a timeframe of a decade, and provides a medium to long term perspective on Bitcoin, which was not the case with the earlier studies.