This paper studies the extreme movements in Bitcoin prices. Since the introduction of Bitcoin in 2010, Bitcoin prices have shown dramatic volatility associated with impressive booms and crashes. We use extreme value theory to investigate the statistical distribution of extreme price movements and to compute risk measures commonly used in both risk and asset management by financial institutions. We also draw some conclusions about the status of Bitcoin as a currency or a speculative asset.
To determine the risk measures for Bitcoin such as VaR (loss risk for a given probability) and BVaR (avereage loss beyond the VaR) is useful for financial institutions or independent traders to manage their positions. In practice, it can be used to set trading limits.
To charaterize Bitcoin as a currency or a speculative asset is important in pratice. For example, it may determine the tax treatment applied to capial gains. Considered as a local currency (such as the dollar in the United States or the euro in the Eurozone), capital gains may be exempt of tax. Considered as specualtive asset, capial gains may be taxed as other financial assets.
The main empirical finding of this article is that Bitcoin should not be considered as a currency due to its high instability but as speculative asset. This statement draws from our empircal study of Bitcoin prices using extreme value theory. The fact that Bitcoin should be considered as a speculative asset implies that the appropriate tax regime for capital gains or losses on Bitcoin should be the same as other financial assets (stocks for example).