The Link Between Return and Risk in the Case of Bitcoin

Abstract

Over time, cryptocurrencies have experienced a widespread adoption, with bitcoin emerging as the most prominent example. In an increasingly uncertain world, the significance of possessing a stable store of value, traditionally fulfilled by gold, has escalated. Bitcoin has been often referred to as a digital equivalent of gold. Hence, this study primarily focuses on analyzing the price dynamics of this particular cryptocurrency. A comprehensive literature review will be employed to examine the regulatory obstacles encountered within the cryptocurrency market. Additionally, considering the contentious nature of this field, special attention will be devoted to the clash of perspectives surrounding this innovation. Subsequently, concentrating on the period 2016-2021, this paper will investigate the factors that define a risk-weighted investment, utilizing the Sharpe ratio and Sortino ratio. However, there has been significant volatility in the price of Bitcoin in 2020-2021, and our research fills a gap in the relationship between Bitcoin returns and risk in the post-2016 period. Overall, the analysis concludes that bitcoin exhibits highly turbulent investment characteristics. Despite its substantial price appreciation, the findings indicate that bitcoin displays significant volatility. Consequently, selecting this investment alternative entails considerable risks. Based on our results, there were years between 2016-2021 when bitcoin was a good investment, but in most cases its returns were associated with excessive volatility and risk. For this reason, it is not recommended for risk-averse rational investors.