Bitcoin and Ethereum -- A Decade of Risk/Return Analysis

Abstract

Bitcoin was the first cryptocurrency in the world launched in 2009 while Ethereum was the second one launched in 2015. This paper evaluates the risk and return for both the cryptocurrencies using CMBI Bitcoin and CMBI Ethereum indices as their proxies since their inception and compares them to 10 traditional asset classes -- U.S. stocks, developed country stocks, emerging market stocks, gold, commodities, energy, U.S. bonds, global bonds, U.S. real estate and global real estate. Both the cryptocurrencies had very high risk, absolute returns and risk-adjusted performance (Sharpe, Sortino and Omega Ratios) compared to other traditional asset classes. Ethereum and Bitcoin also had very high cumulative returns and generated much more wealth compared to other asset classes. However, both the cryptocurrencies also had very high maximum drawdown and monthly downside deviation compared to traditional asset classes. Overall, Bitcoin and Ethereum are extremely high risk, high reward plays for investors.