Bitcoin an Asset Class – Market Risk Assessment for Indian Investors

Abstract

We address the issue of the financial risk that Bitcoin poses for the Indian investors and traders by comparing various risk measures, risk adjusted performance measures and the volatility behaviour for Bitcoin with those for INR/USD exchange rate, gold futures, Indian equity index (Nifty 50) and Indian bond index.

We find Bitcoin to be a unique asset class with the safe haven property similar to that of gold, potentially offering diversification benefits but possessing high financial risk. In our two year sample, the standard deviation, Value at Risk (VaR) and expected shortfall (ES) for Bitcoin were - 5.5 times higher than those for the equity index but the corresponding mean returns were - 8 times higher too. Though the static ex-post risk performance measures such as Sharpe ratio, Sortino ratio, VaR ratio and the expected shortfall ratio could be superior for Bitcoin in a specified period, the usage of these measures in the investment decision making may prove to be erroneous. As the volatility analysis using sGARCH(1,1) – M and GJR-GARCH(1,1) - M indicates, the conditional standard deviation and VaR for Bitcoin could be higher in the first quarter of 2018.

Keywords: Bitcoin, Crypto-currencies, Sharpe Ratio, Sortino Ratio, Value at Risk, Expected Shortfall, Extreme Value Theory, Asymmetric GARCH models, GARCH in Mean models

JEL Classification: C58, G11, G32