Research Proposal

Topic: An Evaluation Of The Relationship Between Return and Risk in the

Cryptocurrency Marketplace

1.0 INTRODUCTION

 Background of the Study

The cryptocurrency market has experienced rapid growth over the past few years. In
April 2021, the total market capitalization of all cryptocurrencies was more than $2
trillion (CoinMarketCap.2021). Investors have found it to be a high-risk, volatile
investment because of its volatility. Investors need to understand the market's risk-
reward ratio to gain a better understanding of this market.

Many studies have investigated the relationship between cryptocurrency market risk
and return. Dyhrberg (2016) discovered that Bitcoin has a positive relationship with
risk and return. This means that higher levels are associated with higher
returns. Similarly, Chu et al. (2018) found positive correlation between risk and return
for several cryptocurrency tokens.

However, there have been mixed results from other studies regarding the relationship
between return and risk in the cryptocurrency market. For instance, Caporale et
al. (2019). There was no relationship between Ripple, Ethereum and Bitcoin's risk and
return. Similarly, Bouri et al. Bouri et.al. (2019). found that the relationship between
return and risk was not consistent across different crypto currencies.

The cryptocurrency market has been a growing asset class and is now attracting
significant attention and investment from investors all over the world. Cryptocurrencies
such as Bitcoin, Ethereum and Litecoin have experienced a significant rise in their
value over time, making them attractive investments. The cryptocurrency market is
volatile, so investors could face significant risks when investing in it.

Investors can suffer severe losses from the high volatility and unpredictability caused
by cryptocurrency market. The risk involved in investing in the cryptocurrency market
is greater than that of traditional stock markets. This makes it a high-risk
investment. Additionally, the cryptocurrency market has a relatively young age, so
there is not much historical data available to fully analyze the returns.

Despite mixed results, further research is needed to determine the relationship

between return and risk in the cryptocurrency market. This study seeks to add to the
existing literature by studying the relationship between risk, return, and the market's
factors.

Investors continue investing in cryptocurrency markets despite the risks. Investors

might not get the expected returns because of the volatility of cryptocurrency
returns. There are many factors that can affect the return and risk of the
cryptocurrency market.
  Statement of the problem

This study seeks to solve the problem of the relationship between risk, return and
cryptocurrency market. This relationship has been the subject of several studies, but
results are mixed. Some studies found a positive relationship with risk and others
found inconsistent results.

Dyhrberg (2016) discovered a positive relationship among risk and return for Bitcoin.
This indicates that higher levels were associated with higher returns. Chu et al. (2018)
found similar positive relationships between return and risk for many
cryptocurrencies. However, Caporale et al. Bouri and al. (2019). The relationship
between risk/return was inconsistent across different cryptocurrency.

Accordingly, there are conflicting results in current literature regarding the relationship
of risk and return in cryptocurrency markets. Further research is needed to give
investors better insight into this market. This study is intended to add to the existing
literature by studying the relationship between risk, return, and the market's factors.

 Research questions

Based on the problem statement, and the literature review the following research
questions are possible to be asked for an evaluation of the relationship between return
and risk in the cryptocurrency markets:

 How does the cryptocurrency market differ from traditional financial markets and
what is the relationship between return and risk?
 What factors impact the risk and return on the cryptocurrency market?
 How can investors manage risks when investing in cryptocurrency markets,
which are high-volatility and lacking regulation?
 How does regulatory change affect the risk and return on the cryptocurrency
market and how can investors adapt?
 Can cryptocurrency be used as a hedge or safe-haven asset during times of
economic uncertainty and how does its performance compare with traditional
safe haven assets like bonds and gold?

These questions provide valuable insight into the relationship between return and risk
in the cryptocurrency market. They also help investors make informed investment
decisions and manage the risks associated to investing in this market.

 Justification of the Study

For several reasons, it is important to assess the relationship between risk in

cryptocurrency markets and returns. First, the market for cryptocurrency has
experienced rapid growth over recent years. The market capitalization of this market
has now reached hundreds and billions of dollars. Many investors are now interested
in the cryptocurrency market, including institutional investors looking to diversify their
portfolios.

The second is that the cryptocurrency market can be volatile and risky. This can result
in substantial losses for investors not fully aware of the potential risks associated with
investing. To make informed investment decisions and manage risks, it is important to
understand the relationship of risk and return in cryptocurrency markets.

It is difficult to assess the risks associated investing in cryptocurrency due to the lack
of transparency and regulation in the market. Investors can manage their risk and
adapt to regulatory changes by understanding the factors that impact the risk and
return on the cryptocurrency market.

For policymakers as well as regulators, it is important to evaluate the relationship

between return and risk in the cryptocurrency market. As the cryptocurrency market
grows and attracts more investors, regulators must understand the risks and create
appropriate regulatory frameworks in order to protect investors and preserve market
stability.

Investors, policymakers, regulators and others need to understand the relationship

between return and risk in the cryptocurrency market. This study will provide insights
into factors that impact the risk and returns in the cryptocurrency markets. It will help
investors make informed investment decisions, manage risks, and adapt to regulatory
changes.

2.0 LITERATURE REVIEW

The cryptocurrency market is high-risk because it is volatile and unpredictable. High

volatility in the cryptocurrency market can cause investors to suffer serious losses
(Katsiampa 2017). Because of the lack regulation, low liquidity, high speculation and
lack of regulation, the volatility in cryptocurrency markets is much higher than
traditional stock markets (Baur & Hong 2018). The cryptocurrency market presents
investors with many risks.

Investors continue investing in cryptocurrencies despite the risk associated with it.
However, the potential for high returns makes this market attractive. Investors might
not get the expected returns because of the volatility of cryptocurrency returns. Bouri
and colleagues. Bouri (2018) states that cryptocurrency's returns are marked by high
volatility. They are also not related to traditional asset types such as bonds and
stocks. According to Bouri et. al. (2018), cryptocurrency markets offer diversification
benefits for investors' portfolios.

Many factors affect the risk-return ratio in cryptocurrency markets, such as market
sentiment and regulatory changes, market liquidity and technological
advances. Urquhart (2016) says that the market sentiment has a significant impact on
the market returns. This sentiment can be positive, negative, or both. Investors'
perceptions can be affected by market sentiment, which can result in an increase or
decrease demand for cryptocurrencies. This can have an impact on the returns
associated to cryptocurrencies.

Risk and return can be affected by regulatory changes. Regulators for cryptocurrency
are still in flux. Any regulatory changes could lead to decreased demand, which can
impact the returns. (Bouri, et al. 2018). The cryptocurrency market liquidity is also an
important factor in determining the risk and return. Cheah (2015) states that the
cryptocurrency market's liquidity is lower than the stock exchange. Low liquidity can
result in increased volatility.
Technology advancements can also impact the risk and return on the cryptocurrency
market. Glaser and colleagues. (2014). Technology advancements in the
cryptocurrency marketplace can lead to increased acceptance for cryptocurrencies.
This can increase the demand and impact the returns associated with them.

Investors must evaluate the risk and return of investing in cryptocurrency markets.
This will help them make informed decisions and lower the risks. According to the
literature review, investors in cryptocurrency markets are subject to high levels of
volatility. However, investors are attracted to the market's potential high returns. Many
factors affect the risk-return ratio in cryptocurrency markets, including market
sentiment and regulatory changes, market liquidity and technological advances. It is
therefore important to understand how these factors relate to the risk and returns in
the cryptocurrency market in order to manage the potential risks of investing in
cryptocurrencies.

2.1 Relationship between risk/return in cryptocurrency market and how it is different

from traditional financial markets

The cryptocurrency market is growing rapidly and has attracted increasing attention
from academics as well as investors. Many studies have examined the relationship
between the risk and return of the cryptocurrency market, and how it compares to
traditional financial markets such stock and foreign exchange.

Researchers have been debating the topic of risk and return in cryptocurrency
markets. Dyhrberg (2016) observed a positive correlation between Bitcoin's risk and
return, while Chu et.al. (2018) showed a positive relationship between return and risk
in several cryptocurrencies. However, Caporale et al. Bouri and al. (2019). The
relationship between return and risk was not consistent across different
cryptocurrency. These mixed results suggest that further research will be needed to
better understand how risk and return relate in cryptocurrency markets.

The unique characteristics and volatility of the cryptocurrency market could be one
reason for the mixed results. The high volatility of the cryptocurrency market is a result
of a number factors including market sentiment, news events, regulatory changes, and
market sentiment (Cheah, Fry, 2015). A lack of regulation in the crypto market could
also contribute to the market's high volatility.

A central authority is absent in cryptocurrency markets. This makes them different from
traditional financial market. Central banks and governments are important in
maintaining stability and market regulation in traditional financial markets. There is no
central authority in the cryptocurrency market. The market is also largely
decentralized. This could contribute to high volatility and high risk.

Additionally, the cryptocurrency market remains in its early stages and technology that
underlies cryptocurrencies is still being developed. Consequently, investors are not
able to reach consensus on how to value cryptocurrency, making it more difficult to
make informed investment decisions and assess risk (Yermack 2018).

Contrary to the cryptocurrency market traditional financial markets such the stock and
foreign exchange have a long history in stability and regulation. These markets are
also established and have well-defined valuation methodologies, making it easier to
make informed investment decisions and assess risk.
It is difficult to determine the relationship between return and risk in the cryptocurrency
market. This requires more research. Although the cryptocurrency market can offer
high returns, it also has high volatility and risk. This may not suit all investors. It will
be crucial for regulators and investors to understand the risks and potential
opportunities that the cryptocurrency market presents as it continues to evolve.

2.2 How to manage the risks associated investing in cryptocurrency markets due to
high volatility and lack thereof

The cryptocurrency market presents investors with many risks, including high volatility
as well as a lack regulation. These risks are why it is important to learn how investors
deal with these risks when investing in cryptocurrency markets.

Diversification is a way for investors to manage risk in the cryptocurrency

market. Diversification means investing in different cryptocurrencies to spread the risk
(Mihajlov, Zafirovski and 2020). Diversification is a way to reduce the volatility impact
on portfolio returns and increase your chances of achieving positive returns.

Stablecoins are another option for investors looking to mitigate risks in the
cryptocurrency markets. Stablecoins, cryptocurrencies, are tied to the value a stable
asset like the US dollar to provide stability and reduce volatility. In times of high
volatility or uncertainty, you can use stablecoins as a safety haven asset.

Technical analysis is also used by investors in the cryptocurrency market to manage

their risks. To identify future price movements, technical analytics involves analysing
past price trends to determine patterns (Toma and co., 2021). Technical analysis can
help identify investment entry points and exit points and manage volatility risks.

Stop-loss orders can also be used by investors to manage the risks associated with
cryptocurrency markets. Stop-loss order are automatic orders that trigger a sale if a
certain price is reached. They help to limit potential losses (Kruger 2019). The
cryptocurrency market is a great place to use stop-loss order, as prices can fluctuate
rapidly and unpredictably.

Although these risk management strategies are helpful, cryptocurrency investing is still
risky. Investors might not fully understand the risks of investing in the cryptocurrency
market due to the absence of regulation. A high level of volatility in the cryptocurrency
market means there are still significant risks, even if risk management strategies have
been put in place.

The best way to manage risk in cryptocurrency market is to use risk management
strategies that are balanced with a deep understanding of the market's unique risks
and opportunities. Investors need to be vigilant and adjust their risk management
strategies to keep up with the changing cryptocurrency market.

3.0 RESEARCH METHODOLOGY

3.1 Research Paradigm

This research paradigm is based upon the positivist approach to social

phenomena. The positivist approach is based upon the belief that the world is
objective and that observation and experimentation can provide knowledge. Data from
secondary sources like financial data, academic reports, and reports will be used to
collect quantitative data. The research will use statistical methods to analyze and test
hypotheses on the relationship between risk, return, and cryptocurrency
market. Research will also use a deductive approach. Hypotheses will be tested with
empirical data and based on existing theories. The research questions and literature
reviews will inform the development of hypotheses. Regression analysis and other
statistical tests will be used to verify the hypotheses.

This study's research paradigm is based on the positivist approach. This emphasizes
empirical methods and the study of social phenomena. The study will use statistical
methods to analyze and test hypotheses. It will use the deductive approach to create
hypotheses from existing theories and then test them with empirical data.

3.2 Research Design

The study's research design involves the collection of data at one time. This study will
use secondary data analysis, which will allow data to be gathered from various sources
like academic articles, reports and financial data.

The study will employ a quantitative research method, and data will be analyzed with
statistical methods. Multiple regression analysis will be used in the study to determine
the risk-return relationship in cryptocurrency markets and identify the factors that
impact risk and return.

The population of cryptocurrency traded on major cryptocurrency exchanges, such as

Binance, Kraken and Coinbase, will form the sample. This sample will include a wide
range of cryptocurrencies such as Ripple and Bitcoin, Ethereum and Litecoin.

Data for this study will come from a variety of sources, including financial data from
cryptocurrency trading platforms, academic articles, reports from regulatory agencies,
and data from other publications. SPSS is used to analyze and collect the data. A
descriptive statistics approach will be used to provide a general overview of data. This
includes measures of central tendencies, variability, distribution, and other statistical
indicators. The descriptive statistics will be used for identifying trends and patterns in
data and providing a general understanding about the cryptocurrency market.

This study's research design is a cross-sectional one that employs secondary data
analysis. The study will use quantitative research, multiple regression analysis,
descriptive statistics, and statistical analyses to determine the factors that impact risk
and return in the cryptocurrency marketplace.

3.3 Sample and Target Population

The study's target population is cryptocurrency traders on major cryptocurrency

exchanges, such as Binance, Coinbase and Kraken. There are many cryptocurrencies
in the population, including Ripple, Bitcoin, Ethereum and Litecoin.

It is difficult to study all the cryptocurrencies because of the high number. A sample
will therefore be taken from the population to represent all of them.
This study will use a purposive sampling method, which means that the sample is
selected based upon specific criteria. This will allow you to choose the right sample
based on these criteria:

 The cryptocurrency must be traded on major cryptocurrency platforms.

 The cryptocurrency must have at least $1B in market capitalization
 The cryptocurrency must have at most one year trading history.

These criteria will be used to select a sample of 20 cryptocurrencies. This is because

the study's goal is to identify risk factors in cryptocurrency markets, and to examine
the relationship of risk and returns in this market. It is not possible to apply the
findings to all cryptocurrencies.

This study targets cryptocurrencies that are traded on major cryptocurrency

exchanges. Purposive sampling, which is based upon specific criteria, will be used to
select 20 cryptocurrencies.

3.4 Data Collection

This study will use secondary sources, such as reports and academic
articles. Financial data will come from cryptocurrency exchanges, such as Coinbase
and Binance. Data for this study will come from secondary sources like academic
articles, reports, or financial data. The financial data from cryptocurrency exchanges
will be used. Data will be preprocessed and cleaned up before being analyzed by
statistical methods. The findings will then be explained and presented in a concise and
clear manner.

3.5 Data Analysis

Data analysis will include both descriptive statistics and inferential stats. The data
analysis will use descriptive statistics to summarize and define the data. Multiple
regression analysis will examine the relationship between return and risk in the
cryptocurrency market. This will identify factors that impact risk and return. The results
will be explained and presented in a clear and concise fashion.