Over the past few years, Bitcoin has been the subject of increased attention within the investment community as the total market cap of cryptocurrency has grown rapidly. This research examines the potential role of Bitcoin within investment portfolios. Using data from January 2012 to December 2021, the study finds that Bitcoin has exhibited an extraordinary level of return and volatility, as well as risk. However, it also demonstrates a low correlation with other asset classes, justifying a closer examination of its impact on a portfolio’s key metrics, such as the Sharpe ratio and efficient frontier.

This research shows that the strength of the correlation between Bitcoin prices, the stock market, and other commodities varies over time. The study observes that Bitcoin possessed “gold-like” characteristics in the early stage of its development, yet investors' attitude toward Bitcoin as a "gold-like" asset fluctuated and disappeared completely after the outbreak of COVID-19.

Furthermore, the research examines the risk and return characteristics of Bitcoin and investigates its potential impact on the optimization of traditional asset portfolios. The research also explores the degree of correlation between Bitcoin and other assets in different periods. Applying four popular asset allocation strategies to portfolios that include Bitcoin, stocks, and bonds, the research evaluates potential weekly returns and the impact of Bitcoin on portfolio optimization at various levels of risk aversion.

Additionally, the study draws efficient frontier curves of Bitcoin, the S&P 500, and bonds, indicating that Bitcoin can significantly improve portfolio returns. Finally, by constructing portfolios that are rebalanced every month and calculating the expected shortfall and return curves, the paper finds that an investment portfolio comprising the market values of Bitcoin and the S&P 500 can increase investment returns and reduce expected losses. In this portfolio, Bitcoin is weighted 25 times that of the S&P 500 component.