Bitcoin is a major virtual currency. Using weekly data over the 2010-2013 period, the author analyses a Bitcoin investment from the standpoint of a U.S. investor with a diversified portfolio including both traditional assets (worldwide stocks, bonds,
hard currencies) and alternative investments (commodities, hedge funds, real estate). Over the period under consideration, Bitcoin investment had highly distinctive features, including exceptionally high average return and volatility.

Its correlation with other assets was remarkably low. Spanning tests confirm that Bitcoin investment offers significant diversification benefits. We show that the inclusion of even a small proportion of Bitcoins may dramatically improve the risk-return trade-off of well-diversified portfolios. Results should, however, be taken with caution as the data may reflect early-stage behaviour which may not last in the medium or long run.

The recent crisis has prompted investors to explore innovative investment opportunities. Bitcoin, a virtual currency, has recently attracted substantial media attention and has now become a standard means of payment over the internet (ECB, 2012). More and more providers of goods and services—legal and illegal—trade in Bitcoins. Importantly, the projected launch of a Bitcoin exchange-traded fund, Winklevoss Bitcoin Trust, shows that Bitcoin is now a credible investment vehicle (Baluchnas, 2013; Arash and Alloway, 2013; Arthur, 2013). Even though currencies are commonly used to diversify financial portfolios, the literature has so far overlooked the investment characteristics of Bitcoin.

Although the Bitcoin transaction network is relatively new and unstudied, we found that this virtual currency exhibits the qualities found in many real-world networks as they evolve, including densification power law, shrinking diameter, heavy-tailed in-degrees, heavy-tailed out-degrees, and communities.