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Digital Currency Risk

Author

Listed:
  • Scott Gilbert
  • Hio Loi

Abstract

Digital currencies, such as Bitcoin, have emerged as an alternative form of money, untethered to traditional money and largely unregulated. As such, digital currency represents a wild frontier for investors who might otherwise be shopping for gold or foreign currencies, with serious risks. The present work considers digital currency from a traditional asset pricing perspective. Setting aside risks of seller fraud or currency theft, we examine fluctuation and systematic risk in the price of Bitcoin. From this perspective, Bitcoin does not appear to carry much systematic risk -- despite its high volatility -- and so is a reasonable candidate for inclusion in investors¡¯ portfolios. Some illustrative examples suggest that the optimal amount of Bitcoin to include in investor portfolios may be tiny or instead substantial - as high as 21 percent of total financial assets.

Suggested Citation

  • Scott Gilbert & Hio Loi, 2018. "Digital Currency Risk," International Journal of Economics and Finance, Canadian Center of Science and Education, vol. 10(2), pages 108-123, February.
    • Handle: RePEc:ibn:ijefaa:v:10:y:2018:i:2:p:108-123
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    Citations

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    Cited by:

    1. Yukun Liu & Aleh Tsyvinski, 2018. "Risks and Returns of Cryptocurrency," NBER Working Papers 24877, National Bureau of Economic Research, Inc.
    2. Guych, Nuryyev & Anastasia, Spyridou & Simon, Yeh & Jennet, Achyldurdyyeva, 2018. "Factors influencing the intention to use cryptocurrency payments: An examination of blockchain economy," MPRA Paper 99159, University Library of Munich, Germany, revised 24 Feb 2020.
    3. Yukun Liu & Aleh Tsyvinski & Xi Wu, 2019. "Common Risk Factors in Cryptocurrency," NBER Working Papers 25882, National Bureau of Economic Research, Inc.
    4. Chioma Nwosu Peace & Bosha Ernest Oryiman & Abubakar Ibrahim Sani, 2023. "Digital Currency and Financial Markets in Nigeria: Impact and Policy Implications," Financial Economics Letters, Anser Press, vol. 2(3), pages 22-36, December.
    5. Musa Ahmed Zayyad, 2022. "Economic Risk, Cyber Threats and Privacy Issues of Blockchain Technology in Nigeria," International Journal of Research and Innovation in Social Science, International Journal of Research and Innovation in Social Science (IJRISS), vol. 6(1), pages 646-649, January.

    More about this item

    Keywords

    Bitcoin; systematic risk; optimal portfolio;
    All these keywords.

    JEL classification:

    • R00 - Urban, Rural, Regional, Real Estate, and Transportation Economics - - General - - - General
    • Z0 - Other Special Topics - - General

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