Riskiness of Investments in Bitcoin compared with stock market

portfolios including their volatilities

Nazeli Ghazaryan/ Deborah Schaudt
FACULTAD DE CIENCIAS ECONÓMICAS Y EMPRESARIALES (Universidad de Cádiz)
APPLIED ECONOMETRICS FOR INTERNATIONAL BUSINESS AND ECONOMICS
Course 2017-2018

Abstract:

Our research aims to answer to the question whether investing in Bitcoin is riskier than
investing in stock market portfolio indexes such as Dow Jones and MERVAL or in famous
companies such as Tesla or Apple. Weekly adjusted returns from May 2013 to May 2018 of
the following companies and indexes has been investigated and compared to the adjusted
weekly returns of BitcoinUSD.

Key words: Bitcoin, Stock Market, Investing, Riskiness, Index

Resumen:

Nuestra investigación tiene como objetivo responder a la pregunta si invertir en Bitcoin es

más riesgoso que invertir en índices de cartera como Dow Jones y MERVAL o en compañías
famosas como Tesla o Apple. Los rendimientos semanales ajustados de mayo de 2013 a 2018
de las siguientes compañías e índices se han investigado y comparado con los rendimientos
semanales ajustados de BitcoinUSD.

Palabras clave: Bitcoin, Stock Market, Invertir, Riesgo, Índice

1. Introduction
Should you invest in Stocks or Bitcoin? – Investors are risk averse and they will choose to hold
a portfolio of securities to take advantage of the benefits or diversification. Therefore, when
they are deciding whether or not to invest in a particular stock, they want to know how the stock
will contribute to the risk and expected return of their portfolios. This paper evaluates the
riskiness of investing in Bitcoin as well as investing in regular stock market portfolios. It
compares the volatility of Bitcoin to four other portfolios in the market: Dow Jones, Merval,
Apple and Tesla in order to lead to reasonable investments.

According to Donier and Bonart (2015) the bitcoin is part of high-speed markets due to its
recent development.1 Therefore, investors are more and more interested in investing in Bitcoin.
“To the mass public, Bitcoin is well known since its creation by its extreme volatility”.2 Due to
the high volatility of Bitcoin many investors are not sure if they should invest in this specific
currency or rather in stock market portfolios which are said to be more safe. However, also
stock market portfolios such as Dow Jones Merval can be volatile. One of the reasons for stock
market volatility, for instance, is shown by country elections. According to Bialkowski,
Gottschalk and Wisniewski (2006) within the time period elections take place the probability of
stock markets to be more volatile is way higher.3

As we see investing in Bitcoin as well as investing in stock market portfolios can bring some
potential risks for the investors. This paper introduces the importance of riskiness while
investing and the factors that make the stocks risky. Based on data this paper helps to evaluate
the riskiness of investing in Bitcoin compared to the riskiness of investing in regular stock
market portfolios (such as Dow Jones and Merval). In order to have more comparable
components and a more trustful result, investments in Bitcoin are compared with investments in
Dow Jones and Merval as well as companies such as Apple or Tesla. Therefore, this paper
concentrates on two main research questions:

1. Do the volatilities of stock market affect the riskiness of the Bitcoin?

2. Is investing in Bitcoin riskier than investing in Dow Jones, Merval, Apple or Tesla?

In section two, it will be described which literature was used in order to support the aim of the
paper. Consequently, section three focuses on the data. Time series plot of the five components
will be shown in a graph and described. In chapter four the model itself is identified and the
variables are explained. Everything will be analyzed and concluded in chapter five which
represents the results and lastly, there is chapter six that gives a conclusion.

1
Cf. J. Donier and J. Bonart (2015)

2
Cff. J. Bouoiyour and R. Selmi (2015)

3
J. Bialkowski, K. Gottschalk and T. Wisniewski (2006)

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2. Literature review

In order to have some valid proof, this paper is based on various related works which are
described in the following. Firstly, information about the Buenos Aires Stock Exchange Merval
Index are gathered from Bloomberg.com. Values for the Merval value in GRETL were taken
from this website in order to compare them with the other components of the model. Yahoo
Finance was used to collect the closing values of Bitcoin USD, Dow Jones, Tesla and Apple.

Secondly, volatilities of Bitcoin were identified. J. Bouoiyour and R. Selmi (2015) find that
there are three main reasons: Too much variance in perceptions of Bitcoin´s store of value and
method of value, Bitcoin’s perceived value fluctuates and Rate of adoption is hampered by bad
press. Moreover, some history of Bitcoin is explained by the paper of P. De filippi (2014). It
basically explains that Bitcoin does not have an intrinsic value. Therefore, Bitcoin is not
supported by anything. In comparison to traditional currencies (e.g. Euros or Dollars), whose
value can be affected by the regulation of the government, the value of Bitcoin is only
determined by offer and demand. From the view of a consumer, however, transactions and
investing in Bitcoin is more risky because it cannot be reversed after. In comparison to
conventional transactions such as payments with credit cards, PayPal transactions, or normal
bank transactions, Bitcoin transactions that have been executed can only be compensated by the
person who received the funds. Additionally, Bitcoins face some legal challenges such as
transactions in the black market, illegal activities, defraudation of tax etc. As a result, it could
happen that governments try to regulate, limit or prohibit the sale of bitcoins.
All of this explains why Bitcoin is so volatile and it could be risky to invest in it.

Next, it was found some really important information about the volatility of regular stock
markets which explains how external influences can have an impact on the volatility of stock
markets. in the paper of J. Bialkowski, K. Gottschalk and P. Wisniewski (2006). This
information is essential for the comparison between bitcoin and stock market portfolios.
The stock market of apple is said to be secure (M. Moore (2018)) as of why it yields to a good
Comparison with the insecure Bitcoin.
The Tesla stock market was analyzed by a paper of Cornell, Bradford, Damodaran and Aswath
which mainly describes the differences in the Tesla stock between 2013 and 2014. CAPM
model in the model section has been clarified based on the respective definitions provided by
Investopedia and .

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3. Data

3.1 Data and sources

All the data has been taken from yahoo.finance.com. Adjusted returns have been taken from 13
May 2013 to 14 May 2018, which compiles 262 observations. Data of the following companies
and indexes have been used: Dow Jones Industrial Average (^DJI), MERVAL(^MERV), Apple
Inc.(AAPL), Tesla Inc(TSLA). and Bitcoin USD (BTC-USD). Time series data has been used.
However, our model has a limitation, as the Gretl software couldn’t interpret the numbers
properly, instead of dates number of ordered weeks is presented.

3.2 Descriptive analysis

Graph 1. Time series plot (closing values, 262 observations)

In the following graph are presented and compared the adjusted closing values of the five
variables. According to the results of the graph, it can be assumed that the Bitcoin’s value is the
most volatile, while it also faces rapid decreases. Meanwhile, Dow Jones faces stable value
increase. Merval has the highest increase, though it’s more volatile compared to Dow Jones.

Graph 2. Time series plot (adjusted returns, 262 observations)

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Source: yahoo.finance.com
In the presented time series plot five variables are presented. Based on 262 observations
Adjusted Returns for each variable is calculated based on adjusted closing values. By looking at
the graph it is already obvious which variables are more volatile and which ones are more
stable. As can be seen, the red line which represents return volatilities of BTC-USD(Rbitcoin)
has the most volatilities, which is already an indicator that it is a less secure index among the
other indexes. The next most volatile index is ^MERV(Rmerval) which is presented in blue
color. According to the plot the most secure index is ^DJI(Rdowjones) which is represented by
green color, because we can see volatilities are the least in case of the green one. Consequently,
the next more secure Index is APPL(Rappl) and then it’s followed by TSLA(Rtesla).

4. Model
Financial incentives to take the risk of investing in Bitcoin can be explained by using the
following specification (CAPM model):

(𝑅𝑖 − 𝑟) = 𝛽0 + 𝛽1 (𝑅𝑚 − 𝑟) + 𝑢

𝑅𝑖 is the dependent variable which shows the returns on shares of Bitcoin and the small letter
“r” represents the risk free rate of interest. Accordingly, 𝑅𝑚 represents the independent
variables which are Rmerval, Rdowjones, Rappl, Rtesla. Beta (𝛽) is the asset elasticity to
market. According to the CAPM, a stock with a beta<1 has less risk than the market and
therefore has a lower expected excess return than the market portfolio. In contrast a stock with a
beta>1 is riskier than the market and presents a higher expected excess return. These betas
typically are estimated by OLS (ordinary least squares). The CAPM model says that the
expected return of a security or a portfolio equals the rate on a risk-free security plus a risk
premium. If this expected return does not meet or beat the required return, then the investment
should not be undertaken.
In order to calculate the model correctly, adjusted returns of the variables are required. The
calculations are based on the adjusted closing values. Firstly, logarithms of all the variables
were calculated and then the difference for each logged variable. Finally, the adjusted return for
each variable were calculated by multiplying each by 100%.

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5. Results

5.1 Main model

Table 1. Descriptive statistics (262 observations)

Variable Mean Median S.D. Min Max
Rbitcoin 1.63 1.58 13.7 -78.8 56.3
Rmerval 0.808 1.2 4.46 -14.7 10.6
Rdowjones 0.185 0.317 1.67 -6.39 5.22
Raapl 0.519 0.763 3.51 -12 14.7
Rtesla 0.445 0.347 5.8 -16.2 15.5

In order to calculate the level of volatility for each variable, summary statistics has been
calculated. In order to understand the volatility Standard Deviation and Mean results should be
compared. The first result to compare is Rmerval. If the mean number 1.63 and the Standard
Deviation result is 13.7 we can say that, adjusted returns of Bitcoin are different by its average
result by 13.7 %. So, it can also be considered as the level of volatility. The same happens in
case of Rmerval and the other variables. Rmerval has a standard deviation of 4.46 which
indicates that it’s different from its mean result 0.808 by 4.46%, so it has a volatility of 4.46
percent. Hence, it can be concluded that the variables Rbitcoin, Rmerval, Rdowjones, Raapl and
Rtesla have volatilities of 13.7%, 4.46%, 1.67%, 3.51% and 5.8% respectively.

Table 2. (262 observations)

Table 3. Ordinary least square model three most important results (262 observations)
coefficient p-value significance
Rbitcoin
Rtesla 0.053005 0.06 *
Rmerval −0.0163009 0.932 *
Rdowjones 0.392425 0.0688 *
Rappl 0.197507 0.0756 *

The first thing to pay attention in the model is the beta coefficient, which is a measure of
the volatility, or systematic risk, of a security or a portfolio in comparison to the market as a
whole. The first examined coefficient is the beta coefficient of Rbitcoin in relation to Rbitcoin,
which equals to 0.05. Hence, as 0.05 is less than we can conclude that Tesla is less risky than
bitcoin, we can also assume that it is 95% less volatile. By looking at the p-value we can also
see that it equals to 0.06 which is higher than 0.05 and has 10% level of significance. So, our
conclusion is that Rbitcoin is not statistically dependent on Rtesla. The next is Rmerval’s
calculated beta coefficient, which equals to −0.0163009. Again, this number is number is less
than one, which means that Rmerval is more secure than Rbitcoin. The 0.932 p-value and 10%
level of significance show that Rmerval is not statistically dependent from Rbitcoin. Even a
negative coefficient number of −0.0163009 in case of Rmerval can also indicate that the
dependent variable Rbitcoin is negatively correlated to Rbitcoin. In case of Raapl and
Rdowjones the results are similar to the results of the dependent variables. In both cases the p-
value is more than 0.05 and have 10% significance. So, Raapl is more secure than Rbitcoin for
79% and Rdowjones for nearly 61%.

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5.2 Robustness
As the p-value for all the independent variables is less than 0.05 and also because only one
independent variable is compared to the dependent variable, there is no multicollinearity. So,
there is no need to do any kind of test. Also, there is also no need to check heteroskedasticity.

6. Conclusion

According to the results the paper had, the most aggressive stock is Bitcoin. The main
conclusions have been done based on Table 1 and Table 2 results. Both results prove that
Bitcoin is quite risky and volatile stock to invest in. It is nearly 13.69% volatile compared to
4.5%, 1.6%, 3.5%, 5.8% riskiness of the indexes examined and at the same time Beta
coefficient results based on OLS models also prove that the other variables are more secure to
invest than Bitcoin. Also based on the same models the assumption has been done that there is
correlation between variables and hence the volatilities of the examined independent variables
have no remarkable impact on the volatilities of Bitcoin. So in order to make a smart investment
it would be suggested to choose a more stable stock with a stable growth , rather than Bitcoin as
chances of failure in case of investing in Bitcoin are the highest compared to other stocks
examined in the paper.

References
J. Donier and J. Bonart (2015): A million metaorder analysis of market impact on the Bitcoin.
P.1 (retrieved 20.05.2018)
J. Bouoiyour and R. Selmi (2015): Bitcoin Price: Is it really that New Round of Volatility can
be on way? P.1 (retrieved 03.05.2018) (https://mpra.ub.uni-
muenchen.de/65580/1/MPRA_paper_65580.pdf)
J. Bialkowski, K. Gottschalk and T. Wisniewski: Stock Market Volatility around National
Elections (2006) , P. 16 (retrieved 04.06.2018)
(https://www.econstor.eu/bitstream/10419/22109/1/p22006.pdf)

M. Zabarankin, K. Pavlikov, S. Uryasev (2014)): Capital Asset Pricing Model (CAPM) with
drawdown measure. P.508 (retrieved 08.06.2018)

P. De filippi: Bitcoin: a regulatory nightmare to a libertarian dream. (2014).

Gerald P Dwyer: The Economics of Bitcoin and Similar Private Digital Currencies, n.p. (
retrieved 08.06.2018)

https://finance.yahoo.com/quote/%5EDJI/history?p=%5EDJI

Bloomberg. https://www.bloomberg.com/quote/MERVAL:IND

M. Moore: The Power of Google, Amazon, Facebook and Apple (2018), P. 21-24.