A comparative analysis of traditional investments and cryptocurrencies

Abstract

This paper explores how Bitcoin and Ethereum differ from traditional financial assets such as gold, Brent crude oil, the S&P 500 and Apple Inc. in terms of risk, return and integration with the traditional financial market over the period of 2018-2025. The thesis evaluates whether these digital assets can serve as viable components of a diversified investment portfolio. The motivation stems from the recent institutionalization of cryptocurrencies, including the recent approval of spot Bitcoin and Ethereum ETFs and wide public interest. 2858 observations of log returns were used to analyse correlation, multivariate regression, volatility, CAPM regression and Sharpe ratio. The results show that Bitcoin and Ethereum exhibit very low correlations with traditional assets, which supports their ability to act as diversifiers. The regression models revealed that gold and the S&P 500 have small but statistically significant explanatory power for cryptocurrency returns, while Apple Inc. and Brent crude oil do not. Volatility analysis confirms that Bitcoin and especially Ethereum are much more volatile than all traditional assets in the sample. CAPM results show that both digital assets respond positively to market movements, implying slow financial integration. Returns of cryptocurrencies were extremely high, but when the Sharpe ratios were computed, cryptocurrencies showed weak risk-adjusted performance, compared to Apple Inc. and gold. Overall, the findings show that cryptocurrencies are assets with high risk and are driven more by crypto-specific factors, but are increasingly integrating into the broader traditional financial market. They provide diversification benefits but only in small allocations.