Determinants Of Cryptocurrency: An Analysis Of Volatility And Risk Return Trade-Off

Abstract

As an investor, volatility plays an important role in decision making. It is defined as the rate at which a
security’s price increases or decreases, i.e., shows pricing behavior during a definite span of time. A high
volatility will lead to high risk. Thus, it becomes critical to determine the volatility and the risk-return trade-off
among investments. This paper tries to document the volatility and risk-return trade-off of four prominent
crypto-currencies (Bitcoin, Ethereum, Binance and Ripple), based on market-capitalization. For analysis,
closing prices of cryptocurrencies has been accumulated through secondary method for 365 days, starting from
1st March 2022 and ending on 28th February 2023. Standard Deviation and Kurtosis, used together for volatility
and risk assessment, documented that Bitcoin has the highest volatility and risk associated with expected
returns. Regression, for assessing the impact of volatility in BTC price on others, derived that ETH has a strong,
but not very strong, bivariate relationship with BTC, among all the pairs. Durbin Watson (DW) test concluded
that there was no auto-correlation in the prices of crypto-currencies, i.e., previous day’s price does not play
significant role in today’s price. For risk-return trade-off, Coefficient of Variation (CoV) has been applied. It
determined that Ethereum has the highest ratio indicating its non-suitability to a conservative investor because
of having the lowest returns as compared to risks involved; while Binance has the lowest Coefficient of
Variation (CoV) depicting lower risk and maximum return among all.