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Sharpe Ratio and Crypto

This tool helps you balance the risk vs. reward of your portfolio

OKEx
Crypto traders are no stranger to risk and volatility, we all know that
cryptocurrency prices fluctuation could be immense, realizing how much
risk should take on or off the table is essentially important when it comes
to making trade decisions and strategy. Sharpe ratio is a tool that enables
investors to examine the overall risk-adjusted return of a portfolio or an
asset, it has been widely used in the traditional financial markets. Now
more crypto traders have adopted this mechanism and have a better
understanding of how much risk to take.

What is Sharpe Ratio?

The Sharpe ratio indicates how well an investment performs in comparison

to the rate of return on a risk-free investment, such as US treasury bonds. It
is a method developed the economist William Sharpe. It can be calculated
by this formula:
where:

● Rp is the expected return on the asset or portfolio;

● Rf is the risk-free rate of return;
● op is the standard deviation of returns (the risk) of the asset or
portfolio

How to interpret a Sharpe ratio?

● A ratio higher than 1.0 is considered acceptable.

● A ratio higher than 2.0 is considered as very good.
● A ratio of 3.0 or higher is considered excellent.
● A ratio under 1.0 is considered suboptimal.
● Negative Sharpe ratio means the risk-free rate is greater than the
portfolio’s return, or the portfolio’s return is expected to be
negative.
Crypto’s Sharpe ratio

Source: Messari

As of August 15th, 2019, out of the major OKEx-listed coins and tokens,
IOST and BSV both have a 30-day Sharpe ratio that is above 1.0. The figure
above shows that IOST’s 30-day Sharpe ratio stands at 2.52, however, the
90-day ratio is negative, which could indicate IOST has a higher risk
compared to other assets, but at the same time, it provided a higher return.
The daily chart of IOST/USDT (below) suggested that the pair seems
initially stabilized after the selloff in mid-July.
Source: OKEx

Using the table above, we see BSV and BTC both have relatively good Sharpe
ratios. BSV’s 30-day Sharpe ratio stood at 1.59, and 90-day at 2.65.
Meanwhile, BTC’s ratios were just behind, its 30 and 90-day Sharpe ratios
were at 0.53 and 1.87 respectively. If we compared the 90-day performances
of BSV, BTC with XRP, which XRP has a negative Sharpe ratio, and it looks
like we have a clear winner.
Source: tradingview.com

It’s another interesting picture when we do a cross-asset risk-adjusted

returns comparison, and obviously, BTC has been ahead of the game for
years.
Source: Woobull Charts
Bitcoin has been giving a higher risk-adjusted return than other major asset
classes. Bitcoin’s 4-year Sharpe ratio has been constantly above 2.0, and it
has reached above 3.0 in 2019. At the same time, the recent rally in
goldprices has made its Sharpe ratio back to around 1.3 level. On the other
hand, bonds and EMFXs were in the negative area.

Aleh Tsyvinski, an economist and currently the Arthur M. Okun Professor

of Economics at Yale University, published a research piece about risks and
returns of cryptocurrency. Tsyvinski noticed that cryptocurrencies usually
have a higher Sharpe ratio when compared to traditional bonds and stocks,
it indicates that cryptocurrencies did not just have greater volatility, but the
investment is worth it because it can generate higher returns.

Conclusion

The Sharpe ratio helps traders and investors to determine which

investment has the highest returns while considering risk. However, it
doesn’t provide much information in terms of price movement and
prediction, rather, it’s a supporting tool to evaluate the risk/return in a
portfolio, this is especially important for participants in cryptocurrency
markets, which investors often face unpredictable volatility.

Disclaimer: This material should not be taken as the basis for making
investment decisions, nor be construed as a recommendation to engage in
investment transactions. Trading digital assets involves significant risk
and can result in the loss of your invested capital. You should ensure that
you fully understand the risk involved and take into consideration your
level of experience, investment objectives and seek independent financial
advice if necessary.