Comparing Bitcoin and Ethereum tail behavior via Q-Q analysis of cryptocurrency returns

TL;DR

This paper analyzes the tail behavior of Bitcoin and Ethereum returns using Q-Q plots and GTS distribution estimates, revealing Ethereum's higher propensity for extreme returns and tail risk compared to Bitcoin.

Contribution

It introduces a comparative analysis of cryptocurrency tail risks using advanced distribution fitting and Q-Q analysis, highlighting differences between Bitcoin and Ethereum.

Findings

Ethereum exhibits more pronounced tail risk than Bitcoin.

Both cryptocurrencies show heavy-tailed return distributions.

Ethereum's extreme returns are more frequent than Bitcoin's.

Abstract

The cryptocurrency market presents both significant investment opportunities and higher risks relative to traditional financial assets. This study examines the tail behavior of daily returns for two leading cryptocurrencies, Bitcoin and Ethereum, using seven-parameter estimates from prior research, which applied the Generalized Tempered Stable (GTS) distribution. Quantile-quantile (Q-Q) plots against the Normal distribution reveal that both assets exhibit heavy-tailed return distributions. However, Ethereum consistently shows a greater frequency of extreme values than would be expected under its Bitcoin-modeled counterpart, indicating more pronounced tail risk.