Cryptocurrency as an Investment Avenue: Risk, Returns, and Regulatory Challenges

Abstract

This study examines cryptocurrency as an emerging investment asset class, analyzing its risk-return characteristics and regulatory environment. Using data from 2016 to 2024, we evaluate Bitcoin, Ethereum, and a diversified crypto portfolio against traditional asset classes. Our findings reveal that cryptocurrencies demonstrate significantly higher returns (mean annual return of 112.7% for Bitcoin) coupled with extreme volatility (annualized standard deviation of 78.4%). Correlation analysis shows that cryptocurrencies maintain low correlation with traditional assets (r = 0.21 with S&P 500), supporting their role in portfolio diversification despite high intra-class correlation. The research identifies four primary risk categories affecting crypto investments: technical vulnerabilities, market concentration, liquidity constraints, and regulatory uncertainty. Regulatory analysis across key jurisdictions reveals a fragmented landscape transitioning from ambiguity to structured oversight. We propose a regulatory equilibrium framework that balances investor protection with innovation and market efficiency. This study concludes that cryptocurrencies represent a high-risk, potentially high-reward component within diversified portfolios, with their optimal allocation heavily dependent on investor risk tolerance and regulatory evolution.