Analysis of Risk Factors When Investing in Bitcoin

Over the last decade, blockchain and cryptocurrencies are considered to be a new phenomenon in the modern financial markets and the subject of close public attention. Currently virtual currencies are developing rapidly and attracting new users both from individuals and businesses due to high speed of transactions, low transaction costs, independence from third parties, security of operations and availability from anywhere. At the same time, the price dynamics of cryptocurrencies is very unstable, which makes investments in them very risky. In this master's thesis we investigate risk factors associated with investing in bitcoin - the very first and best known of all existing virtual currencies at the moment. In the paper, we consider existing approaches to the risk assessment of volatility based on variances, yield half-variances, linear deviations, modified Gini coefficient, group of VaR methods, models of autoregressive conditional heteroscedasticity, exponentially weighted average, geometric Brownian motion, market sensitivity, etc.. In addition, we review empirical studies of bitcoin price dynamics and the factors determining it (macroeconomic, technological and illustrating the attractiveness for investors). The empirical part of the thesis is based on data on bitcoin prices from January 1, 2012 to April 30, 2018 from Bitcoincharts.com. We explore the nature of the distribution of the logarithmic yields of the crypto currency and then the relevant methods for assessing the risks of investing in it. As a result we consider numerical examples of calculating the volatility risk in different classes of risk assessment models.