Risk return analysis of top five cryptocurrencies: An empirical examination

The surge in the crypto market has acted as a magnet for new investors. Although the market is highly volatile and risky, it attracts a lot of investors due to the high returns. As this new digital currency rose in popularity it brought along various questions for the investors. As of 2021, there are over 6000 cryptocurrencies available. However, for this research top, five cryptocurrencies have been selected based on their market capitalization, namely – Bitcoin, Ethereum, Binance, Cardano, and Tether. To get a better understanding of this investment asset, first up the price movement is examined from 2nd October 2017 to 6th July 2021 to apprehend the volatility, followed by evaluating the connectedness among price fluctuations of the selected cryptos. Bitcoin, Ethereum, Binance, and Cardano exbibit a similar price pattern and high volatility as compared to Tether which has been stable and displayed a different price pattern. The correlation matrix represents a similar picture as it yielded a strong positive correlation for Bitcoin, Ethereum, Binance, and Cardano, on the contrary Tether yielded a low negative correlation with the other four currencies. Additionally, Bitcoin is the currency with the highest market capitalization was checked to have an impact on the prices of Ethereum, Binance, and Cardano. The results showcase a causal effect of Bitcoin price on the prices of Ethereum, Binance, and Cardano, which can further be used to make price predictions of the dependent coins. The study can be useful for the investor to examine the risk return and effectively combine the assets in a manner that ensures low risks and high returns.