Analysis of Bitcoin's Impact on the Efficiency of a Diversified Portfolio for Brazilian Investors.
| Autor | Batista, Davi Trindade |
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Introduction
In the last decade, Bitcoin was certainly the (new) asset that most attracted the media and part of the scientific community, and recently that interest has reached non-specialist audiences. However, although there is already some investigation, many questions about that cryptoasset still need to be answered. Among them, whether Bitcoin would increase the efficiency of a diversified portfolio in the local and global financial markets. Therefore, this article aims to answer the following question: is Bitcoin investment capable of increasing the efficiency of a diversified portfolio of retail investors in the Brazilian market?
There are several studies on the impact of Bitcoin on the efficiency of the investment portfolio in some of the leading international markets (see, for example, for the United States, Briere, Oosterlinck, & Szafarz, 2015; Wu & Pandey, 2014) and studies on the impact of the inclusion of specific assets and indices in the investment portfolio of the Brazilian market (Caldeira, Moura, Santos, & Tessari, 2014; Cunha & Samanez, 2014; Lopes & Furtado, 2006; Oliveira & Silva, 2009; Silveira & Barros, 2010). However, studies that address Bitcoin's potential influence in a diversified portfolio of assets within Brazilian investors' reach are unknown, so the present study contributes to the finance literature.
The study results are potentially interesting due to the Brazilian market's structural difference compared to those of more developed countries, emphasizing the United States. While these are deep capital markets with sophisticated investors and have lived with low-interest rates, Brazil still lives with high real and nominal interest rates and has a poorly developed capital market. Another significant difference between Brazil and most developed countries concerns economic freedom: Brazil occupies the 153rd position in a ranking of 180 countries, having been placed in the mostly unfree category and with scores alarmingly close to that of the the worst category (repressed category), which is a country that "represses economic freedom" (Heritage Foundation, 2018). According to the Organization for Economic Cooperation and Development (OECD), Brazil's financial literacy level is low (Organization for Economic Cooperation and Development, 2015). This OECD survey indicates that even the country's new generation will have difficulty understanding cryptoassets like Bitcoin.
However, it is noteworthy that although the present study focuses on Brazil, its conclusions are relevant to other countries, given that there is evidence that investors use Bitcoin as an alternative for investing their money in multiple small and emerging markets. That is the case of Cyprus (Farrell, 2013), Greece (Rosenfeld, 2015), Argentina (Popper, 2015), India (Kashyap, 2016), China (Wildau, 2017), Zimbabwe (Urban, 2017), Venezuela (Voge, 2018) and Turkey (Cuen, 2018).
It should also be borne in mind that, even for more developed markets, the literature focuses on the initial phase of Bitcoin (2010-2013) (e.g., Briere, Oosterlinck, & Szafarz, 2015; Wu & Pandey, 2014), while this article encompasses the following period, during which Bitcoin was consolidated and reached a broader audience, thus being a complementary contribution to studies carried out outside Brazil.
This study is also relevant in terms of regulation and supervision of the capital market, since, although Bitcoin is outside the competence of the Securities and Exchange Commission of Brazil (SEC) because it is not a security, it is the responsibility of this authority to adjust the regulation of the Brazilian capital market according to its evolution and disseminate financial education to the population. It should be pointed out that there are already more than one million investors registered on Bitcoin exchanges in Brazil, a number higher than that of investors on the B3 stock exchange (the new name of BM & FBovespa) (Guimaraes, 2018).
This article presents evidence that adding a small portion of Bitcoin to an investor's diversified portfolio in the Brazilian market would have increased its efficiency in the period 2013Q3-2018Q2. The present investigation is also of interest to spheres of regulation and supervision of the capital market due to the "side effect" on cost of capital. If Bitcoin becomes a popular alternative among investors, it is reasonable to assume that the cost of capital for Brazilian companies will rise, increasing the opportunity cost for those who stop investing in Bitcoin to invest in securities.
Thus, from a theoretical view, Bitcoin was expected to contribute positively to the diversification of the portfolio if its correlation with the other assets and indices of the Brazilian market was low. However, this study is relevant because it calculates and finds that that correlation is low. Besides, Bitcoin eventually has a high idiosyncratic risk that could minimize its presence on efficient portfolios. Therefore, it was not undoubting that Bitcoin would come to integrate investment alternatives with relevant weight, nor that it would cause a positive, statistically significant shift and an expansion of the efficient frontier of the Brazilian retail market.
Furthermore, the present study goes beyond calculating and spotting low correlation and high idiosyncratic risk to find evidence and quantifying the increased efficiency of diversified portfolios that include Bitcoin. We use several criteria to perform this quantification, such as measuring the positive shift with the efficient frontier's statistical significance, minimizing the standard deviation, and maximizing the Sharpe, Sortino, and Omega ratios.
Moreover, the article is structured as follows. In the next section, Bitcoin is presented, mainly as an investment asset. Also, we review the literature regarding the impact of Bitcoin on the efficiency of portfolios in various regions of the world and the impact of specific assets and indices on the Brazilian investor portfolio's efficiency. Section 3 presents the methodologies and data used in the investigation, while section 4 summarizes and analyzes the study results. Finally, in the last section, the conclusions of the investigation are exposed.
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Bitcoin Characterization and Literature Review
2.1 Bitcoin as an Investment Asset
On November 1, 2008, Nakamoto (2008) presented to the community of an online discussion forum his article that dealt with an electronic form of money that would allow making payments on the internet without financial institution intermediation. By eliminating intermediaries, Bitcoin would reduce transaction costs, making them cheaper. For that, he proposed a way to solve the "Byzantine Generals Problem", a question of the field of distributed computing systems. In practice, the author made it possible to overcome double-spending, based on the public and decentralized record of the moment that the transaction was carried out. The problem of double-spending, responsible for the failure of several digital currencies that emerged until then, stems from the fact that previous virtual money versions were a computer file. Thus, creating copies of the file (counterfeiting the currency) or sending the same file to different counterparties was the big issue to be resolved. And Bitcoin managed to solve it.
On January 3, 2009, Satoshi Nakamoto published the first version of the computer program related to what he wrote in his article. Bitcoin emerged.
Bitcoin allows irreversible transactions, has a maximum amount of digital currencies (21 million), and a pre-established rate of creation of new currencies, in addition to a public history of transactions. Anyone can create an account on the Bitcoin network without paying any fees, submit to the analysis and approval of a centralized entity, or even inform their identity. These rules result in a system that appears more flexible and less subject to regulatory oversight than other payment methods --although these benefits face relevant limitations linked to governance and the risks that differentiate Bitcoin from other payment methods and of store of value (Bohme, Christin, Edelman, & Moore, 2015).
Comparing Bitcoin with other assets that could provide a low correlation with the other assets in a portfolio, one can say that Bitcoin allows the investor to hold and transport his investment, unlike the other available assets. This statement is also partially true for assets such as gold, but Bitcoin is intangible, which makes custody and transportation more easily than gold. The Bitcoin holder needs to store and transport an alphanumeric password (which he can even memorize), giving him access to his assets, in the same way that a user only needs to memorize his provider password emails to make his messages available.
Thus, from the retail investor's perspective in the Brazilian market, which lives with an environment of low economic freedom and a high level of perceived corruption, the innovation brought by Bitcoin can be of considerable value. Notice that, about 30 years ago, Brazilians were surprised by the blocking of a portion of their money deposited in a checking account and savings account, a fact that occurred not long after the former President Fernando Collor de Mello took office.
From the perspective of citizens of other countries, the recent past presents evidence that Bitcoin was used as an alternative to shield wealth in crises or as a way to make financial transactions possible in the face of the deterioration of the local sovereign currency, as we have already cited cases from Cyprus (Farrell, 2013), Greece (Rosenfeld, 2015), Argentina (Popper, 2015), India (Kashyap, 2016), China (Wildau, 2017), Zimbabwe (Urban, 2017), Venezuela (Voge, 2018) and Turkey (Cuen, 2018).
However, there are reasons to believe that Bitcoin is taking on a commodity's characteristics and moving away from its original currency conception for transactions...
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