Question

Your parents are interested in investing in Bitcoin but they are unsure about the risk associated with cryptocurrencies. Your parents believe in your financial knowledge and ask you to compile a risk evaluation of Bitcoin. Compile a risk evaluation of Bitcoin that includes the following points using data from https://coinmarketcap.com/currencies/bitcoin/historical-data/ :

1. Draw a plot that shows closing Bitcoin prices and Bitcoin market capitalization on the y-axis and the time on the x-axis for the period 28^th April 2013 – 24^th February 2019. Comment on the development of the two time series. (maximum 60 words)
2. Calculate the average daily log return of closing prices and the volatility (standard deviation) of the daily log return of Bitcoin and a stock of your choice for the period 24^th February 2018 – 24^th February 2019. Compare the average return and the volatility of Bitcoin and your chosen stock in terms of their risk and return profile. (maximum 60 words)

Answer 1

a.

Based on the chart above it can be seen that the increase in the market cap of bitcoin in 2017-18 has been purely due to speculation of Bitcoin prices. In 2019, the prices have come back to normal.

b. For Bitcoin,

For Apple Stock,

Clearly, the avg returns on Bitcoin are negative(-.359%) and on Apple they are low but positive(0.00024%).

Also, the volatility with Bitcoin prices is very high(1906.346) and with Apple stock it is low(21.89374). Clearly indicates that the risk with Bitcoin is many times higher than with Apple Stocks