Risk assessment of Bitcoin: An application of Extreme Value Theory

Abstract

The purpose of this paper is to determine whether the highly volatile asset such as Bitcoin

can become a mainstream investible financial asset class by comparing it to a veteran commodity

like gold, silver and platinum, also known as the “three precious metals”. Which are held and

used by investors to hedge risk in case of financial instabilities, whose prices fluctuate

considerably, introducing risks of their own, making the commodities suitable for comparison.

For investors an understanding of the risk characteristics is of utmost importance which is why it

is important to assess the probability of rare and extreme events when considering investing in

high volatile assets. For the risk analysis we are using extreme value theory (EVT) to statistically

model such events and compute extreme risk measures. The results have shown that Bitcoin

return distribution not only exhibits higher volatility but significantly higher Value-at-risk and

Expected shortfall than the Three precious metals. Bitcoin return distributions also displays

stronger non-normal and heavier tail characteristics.