Crypto Meets the Classics: Evaluating Bitcoin in Modern Portfolio Theory

This article investigates the role of Bitcoin in enhancing the performance and risk characteristics of traditional investment portfolios. Using historical return data, we construct portfolios by pairing Bitcoin and other asset classes individually with a representative equity index (SPY or QQQ). We evaluate each portfolio’s performance across key metrics, including the Sharpe ratio, Sortino ratio, volatility, and maximum drawdown. The analysis is conducted over four distinct periods—the full sample, pre-COVID, during COVID, and post-COVID—allowing us to assess Bitcoin’s behavior under varying market conditions. The central question is whether adding Bitcoin to a traditional equity portfolio improves the risk–return trade-off or introduces excessive downside risk, especially during times of heightened market stress. While Bitcoin’s presence in financial markets has expanded rapidly, its empirical role as a portfolio diversifier remains underexplored. Our findings contribute new evidence on Bitcoin’s diversification potential and offer practical insights for portfolio construction in an evolving financial landscape.