Assessing the probability of bankruptcy when investing in cryptocurrency

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The cryptocurrency market is not regulated, people and companies wishing to invest in cryptocurrency do not have the same protection as when investing in other assets. In the absence of information and regulatory laws, investors should decide if cryptocurrencies make sense for their financial goals and what kind of investment strategy to choose not to go bankrupt. The aim of the study is to determine the probability of “tail events” and to assess in this way the probability of bankruptcy when investing in cryptocurrency using the Monte Carlo method. The analysis is carried out on the period from September 1, 2014 up to July 1, 2022. Despite the fact that today there are more than 10,000 types of cryptocurrencies, Bitcoin was chosen to assess the probability of bankruptcy. The reason is that Bitcoin is the world’s first decentralized cryptocurrency and its data is stored in a long-term history, which allows testing a long-term investment strategy. Besides, Bitcoin has not gone through a period of persistent inflation that makes the result of testing a short-term investment strategy more reliable. To date, there are around 25 million Bitcoin holders, representing 42.2% of the crypto market. Almost all cryptocurrencies have been proven to follow Bitcoin. The probability of bankruptcy for a short-term cryptocurrency investment strategy is about 17%-23%. For a long-term cryptocurrency investment strategy, the probability of bankruptcy fluctuates from 13% to 16%. Contrary to popular belief, investors looking to avoid bankruptcy should prefer a long-term strategy. The best way for cryptocurrency investors to protect themselves from bankruptcy is to alternate long and short investment periods.

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    • Figure 1. Monte Carlo simulation result of investing in cryptocurrency
    • Figure 2. Monte Carlo simulation result of a short-term cryptocurrency investment strategy (the profit/loss per one Bitcoin)
    • Figure 3. Monte Carlo simulation result of a long-term cryptocurrency investment strategy (the profit/loss per one Bitcoin)
    • Table 1. Monte Carlo simulation results for short-term and long-term cryptocurrency investment strategies (the profit/loss per one Bitcoin in dollars USA)
    • Table 2. Monte Carlo simulation results for short-term and long-term cryptocurrency investment strategies (average profit/loss per one Bitcoin in dollars USA)
    • Conceptualization
      Serhii Kozlovskyi, Iaroslav Petrunenko
    • Formal Analysis
      Serhii Kozlovskyi, Iaroslav Petrunenko, Vira Butenko
    • Methodology
      Serhii Kozlovskyi, Iaroslav Petrunenko, Natalya Ivanyuta
    • Project administration
      Serhii Kozlovskyi
    • Resources
      Serhii Kozlovskyi, Iaroslav Petrunenko, Hennadii Mazur
    • Supervision
      Serhii Kozlovskyi
    • Writing – original draft
      Serhii Kozlovskyi
    • Writing – review & editing
      Serhii Kozlovskyi, Hennadii Mazur
    • Investigation
      Iaroslav Petrunenko, Vira Butenko
    • Validation
      Iaroslav Petrunenko, Hennadii Mazur
    • Visualization
      Iaroslav Petrunenko, Hennadii Mazur, Vira Butenko, Natalya Ivanyuta
    • Funding acquisition
      Hennadii Mazur, Vira Butenko, Natalya Ivanyuta
    • Data curation
      Vira Butenko, Natalya Ivanyuta
    • Software
      Natalya Ivanyuta