FAKULTAS EKONONI DAN BISNIS

JOURNAL

ADDING BITCOIN TO INCREASE INVESTOR’S RETURNS

ALDO LEO HANDOKO

115170270

TAHUN 2019/2020
 ADDING BITCOIN TO INCREASE INVESTOR’S RETURNS
ABSTRACT
Purpose Showing cryptocurrency, especially
Bitcoin ,be one of the investment portfolio
for diversification.
Design/Methodology/Approach This research will use Adjustment mean-
variance theory and Portfolio Compositions.
There are limitations using CAPM for
Bitcoin due to The CAPM fails to produce
any significant _ coefficients due to the
higher moments of Bitcoin’s return
distribution.
Findings From this research, Bitcoin appears to be an
attractive investment
that can substantially increase the return/risk
ratios of an efficient portfolio–even when we
impose considerable return penalties.

But, there is some reason why Bitcoin still

has a probability of big volatility, and this
statement makes a conclusion that Bitcoin
still has some risk but it’s make senses
because the big volatility can be a best
situations for the speculators.
Research Limitations/Implications The focus of this research is to reveal that
Bitcoin can be a new investment asset, as a
mutual fund or portfolio diversification.
Originality/Value This research using a mutual fund
formulation and finance paradigm of
Indonesan investor’s perspective only that
presenting a developing country, not global
investor’s perspective.
Keywords Bitcoin, Portfolio Diversification,
Cryptocurrency, Digital Currency.
Paper Type Research paper

I. INTRODUCTION
Cryptocurrencies are becoming widespread throughout the world (Hileman and
Rauchs, 2017). Cryptocurrencies have been used in a variety of ways, from means of
payment to speculative trading assets, and, importantly, investments as stores of value
(Narayanan et al., 2016; Ram et al., 2016; Antonopoulos, 2017). Commentators note that
cryptocurrencies are becoming more integrated into society than ever before (European
Central Bank, 2012, 2015; He et al., 2016).
 Cryptocurrencies are so named because they rely on a branch of mathematics known
as cryptography to ensure the security of transactions (Narayanan et al., 2016).
Cryptocurrencies are digital, without a physical form (Chuen, 2015; Kelly, 2015) and are not
governed by any central entity – they are decentralised (Nakamoto, 2008; Emery, 2016).
They are, rather, controlled by computer nodes in a peer-to-peer network where all
transactions are recorded on an immutable public ledger called the blockchain (Chuen, 2015;
Franco, 2015)

One of cryptocurrency is Bitcoin. With this focus, it is important to note that there are
many other cryptocurrencies (Hileman and Rauchs, 2017). Examples of other
cryptocurrencies include Ethereum, Ripple and Bitcoin Cash (Hileman and Rauchs, 2017)
which are the next largest cryptocurrencies by market capitalisation (CoinMarketCap, 2018).
Bitcoin is regarded as a standard example of a cryptocurrency (Burniske and White, 2017)
and was chosen for this study because it is the largest cryptocurrency by market capitalisation
(CoinMarketCap, 2018). The market capitalisation (at the time of writing) of Bitcoin is over
US$1.8bn (CoinMarketCap, 2018).

Bitcoin is one of cryptocurrencies that has a largest market-capitalization around the

world. Bitcoin is the first cryptocurrency, was generated by anonymous named Satoshi
Nakamoto. The motive of making a currency based on network and digital are want to make a
decentralised currency that government can’t participate to control this currency and from
government’s fraud; and Make a new peer-to-peer cashless transaction without intervention
of trusted third party, especially for global transaction. Instead of using Bitcoin, individuals
or firms will have less cost of transaction.

Bitcoin is actively traded on more than 60 online exchanges, and thousands of

businesses – including Microsoft, Overstock.com and Dell – accept Bitcoins as payment for
their products or services. Low transaction costs have helped it gain a foothold in the
remittance market as well. According to a report published by the World Bank in 2015, the
average remittance fee is 6.84% of the transaction size ( world bank group 2019). When
compared to the average fee 0.00006008 BTC ($ 0.48) required for transaction, its utility for
remittances becomes clear (Blockchain.info) .

But there are some risks too, like price volatility. Now, we can see the price of bitcoin
from October 20th 2018 till 2019 is from $ 6,489 to $7,954, with the lowest price $ 3,225 and
the highest price $ 12,686. It means bitcoin isn’t stable yet, and make investors become more
hesitant to add bitcoin as their portfolio because of this risk. There are also ongoing concerns
about the ability of the Bitcoin network to handle large transaction volumes1 . Because of
these issues, Bitcoin currently does not effectively operate as originally intended. High
volatility impedes its ability to act as a store of value, while the network scalability issues
hinder its viability as a medium of exchange (Portfolio Diversification with Bitcoin ,Andrew
Carpenter).

Bitcoin has managed to disrupt several established domains, which has garnered
considerable attention from academics in the fields of computer science and law. In spite of
this, financial literature pertaining to Bitcoin is scarce. Although it is not currently a viable
currency or long-term store of value, there is evidence that Bitcoin has merit as a digital asset.
Briere, Oosterlinck, and Szafarz (2015) use spanning tests and a traditional mean-variance
framework to show that including a small portion of Bitcoin in a well-diversified portfolio
can substantially improve risk-return tradeoffs (Portfolio Diversification with Bitcoin,
Andrew Carpenter).

II. DATA

Description

The first major Bitcoin exchange, Mt. Gox, was established in 2010 . Due to the lack
of consistent trading volume prior to 2012 (Figure 2), we omit data collected prior to January
1st, 2012 (Portfolio Diversification with Bitcoin Andrew Carpenter). This leaves over 7
years of daily observations that span from January 2012 to May 2019. But now, in this
research, we will using data collected from 2018 to 2019 (for one year from Oct 2018 to Oct
2019 (Monthly data)). Using a new data will be effective for investors to assess expected
return and risk for their’s portfolio. In order to represent the well-diversified portfolio of a
Indonesian investor we use some various indexes like composite (IHSG) that representing all
stock that available for investor and liquid, also Foreign currencies like U.S Dollar (USD)
and biggest commodity that traded among all Indonesian Investor like Gold (using gold as the
commodity is the best choice because all Indonesian people like to save gold as portfolio (for
speculating) and for marriage. Also trading golds can be more secure than the other.)

Historical Performance and Return Characteristics

A performance comparison of Bitcoin between the assets in our representative portfolio is
presented in the table. Regression coefficients and expected return calculations are obtained
from the CAPM Calculation (Sharpe 1964).

rf  the risk free rate (we assume rf = 0)

ri,t  the log-return to a particular stock or asset in period t

rm,t  the log-return to the market

β  the systematic risk associated with a given stock

α  the stock's alpha, or abnormal return
Note :

ri,t – rf is called the excess return on the stock, rm,t – rf is the excess return on the market,
and eit are the residual (random) returns.

Table 2 includes two risk adjusted performance metrics – the Sharpe Ratio (Sharpe 1994).
The Sharpe Ratio is like Coefficient Variance (the opposite) that represents the risk-return
tradeoff of holding a particular asset, with risk measured as the standard deviation of the asset
returns (Portfolio Diversification with Bitcoin ,Andrew Carpenter).

μ is the expected return,

σ  the standard deviation of returns

μ  expected return (Mean) from stocks

III. METHODOLOGY
Mean-Variance Theory
This theory give us a perspective that make a portfolio diversification, especially with
uncorellated assets let the investor to reduce some risks, and increasing some returns too.
Mean as the returns and variance as the risk of the asset. With this theory, we can see how
much the bending of the efficient frontier that representing the how much the allocation of
the asset and how much the risk and return we can take.

Since it is uncorrelated with any other asset, and its CAPM, β is not significantly different
from zero, we hypothesize that Bitcoin can increase the performance of our portfolio by
mitigating systematic risk, like market risk, country risk, legal risk, and etc. In order to
evaluate the viability of Bitcoin as a part of an efficient portfolio and to avoid imposing the
complexity of Mean-Variance method, we use a traditional Markowitz mean-variance
framework (Markowitz 1952), but with a bit adjustment.

We using the Single Period Mean-Variance Optimization in spite of the Multi Period Mean-
Variance Optimization because of our aim that only focus at the impact of adding Bitcoin for
the portfolio for one year only.

Portfolio Compositions

This assumes no preference about the weights, wi our assets can take–only that we hold
positions. The composition or allocation of assets we assume that all of the asset will have the
same proportions.
0 ≤ wi ≤ 1

IV. RESULTS
The Efficient Frontier

Based on the real and risk adjusted performance of the portfolio, we conclude that
adding a bitcoin as the portfolio diversification still containing high risk, but also containing a
high return for investors. If we using this efficient frontier to refuse using bitcoin for
portfolio. And in this curve, we can see that the best portfolio is only using IHSG, Gold, and
USD as the asset with the weight composition 2:1:1 will reduce the risk to 1,5% with the
same level of return we can gain, is 0,35%.

Using this method, we can see that bitcoin really have a high risk because of the
uncorrelation with the market and country. This could be a positive effect like an asset can
give a high return in the worst market conditions, but could be a negative effect too like
bitcoin has a big range of the volatility that the worst risk. Example like the price volatility
that we collected before, telling us that the lowest price and the highest price of bitcoin is $
3.225 and $12.686.

V. CONCLUSION
Using the adjusted mean-variance model, we have shown that Bitcoin appears to be an risky
asset
that can substantially increase the return/risk ratios of an efficient portfolio. These results
align with the findings of Briere et al. (2015) and Eisl et al. (2015). Theoretically, its value is
a function of utility, but Bitcoin’s various roles as a currency, a remittance vehicle, and a
distributed consensus network add a multitude of variables that can significantly affect its
perceived utility and consequently its price (Portfolio Diversification with Bitcoin ,Andrew
Carpenter).

There are two options for the recommend of using bitcoin as a portfolio. First is tell us that
bitcoin as a diversified portfolio is a bad choice. The fact is, with bitcoin, the level of risk or
Standard Deviation will increase. We can see from the chart of the efficient frontier that tell
us if we add bitcoin to the portfolio, the risk will increase significantly, but this will increase
the expected return too, just like the theory of investment “High Return will make the asset
become High Risk”.

The second is tell us that bitcoin as a diversified portfolio is a good choice. Why can we say
that bitcoin is a good asset? The uncorrelation of bitcoin with the other asset is the the answer
of this problem. From the data, we calculate the return of each assets and compare it with
other data. From this comparison, we can tell that bitcoin have a negative correlation with the
IHSG, but have a positive correlation with Gold and USD. IHSG uncorrelated with Bitcoin
make a conclusion for Indonesia Investor for adding Bitcoin for the portfolio. But Bitcoin
Correlated with Gold and USD because of the number of U.S investor (the largest), so that
make Bitcoin become more sensitive with USD and Gold. And with Sharpe Ratio or
Coefficient Variance formulation, it will display the CV of the portfolio without Bitcoin is
6.55%, is much higher than CV of the portfolio with Bitcoin 5.26%.

And for the final answer is accepting Bitcoin to become one of the asset for the portfolio
diversification. The answer is from the CV of the portfolio with Bitcoin and the Theory of
investment. Theory of investment tell us asset that doesn’t has a risk is impossible, and if
investors want to gain the return form investment need the risk as well, so return and risk is
one package of the investment (Mean-Variance Theory). The CV also become one of the
base of this conclusion. As the risk-averter investor, adding bitcoin can reduce the risk to
1.29%. With another perspective of the decision making, Cryptocurrencies could be as a new
legal currency and tool for the transactions for the future, make a conviction that investing
through Bitcoin will be a good decision.

VI. TABLE AND FIGURE

VI.I. Chart of Bitcoin Average Transactions Fee

VI.II. Chart of Bitcoins Price Volatility

VI.III. Table of Correlations of The Variable
Correlations
IHSG EMAS BTC USD
Pearson Correlation 1 -.072 -.487 -.650*
IHSG Sig. (2-tailed) .823 .108 .022
N 12 12 12 12
Pearson Correlation -.072 1 .432 .569
EMAS Sig. (2-tailed) .823 .161 .054
N 12 12 12 12
Pearson Correlation -.487 .432 1 .472
BTC Sig. (2-tailed) .108 .161 .121
N 12 12 12 12
*
Pearson Correlation -.650 .569 .472 1
USD Sig. (2-tailed) .022 .054 .121
N 12 12 12 12
*. Correlation is significant at the 0.05 level (2-tailed).

VI.IV. Chart of The Efficient Frontier of Portfolio

1.6000%

1.4000%

1.2000%

1.0000%

0.8000% without BTC

with BTC
0.6000%

0.4000%

0.2000%

0.0000%
1.0000% 2.0000% 3.0000% 4.0000% 5.0000% 6.0000% 7.0000% 8.0000%
VIII. REFERENCES

Briere, Marie, Kim Oosterlinck, and Ariane Szafarz. 2015. “Virtual Currency, Tangible
Return: Portfolio Diversification with Bitcoins.”
Carpenter, Andrew. 2016. “Portfolio Diversification with Bitcoin”
Eisl, Alexander, Stephan Gasser, and Karl Weinmayer. 2015. “Caveat Emptor: Does Bitcoin
Improve Portfolio Diversification?”
Group, World Bank. 2019. “Remitteance Price Worldwide”
Markowitz, Harry. 1952. “Portfolio Selection.” The Journal of Finance 7 (1): 77–91.
Nakamoto, Satoshi. 2008. “Bitcoin: A Peer-to-Peer Electronic Cash System.”
———. 1994. “The Sharpe Ratio.” The Journal of Portfolio Management .