Top 12 Cryptocurrencies Ranked by Risk-Adjusted Return
TL;DR: The Sharpe Ratio is an excellent tool to assess risk-adjusted return on an investment. 4 cryptocurrencies (Bitcoin, Dash, Monero, and Bitcoin Cash) all have Sharpe Ratio’s over 2, which signals a good investment per risk involved.
The Long Version
How many people have told you that cryptocurrencies are too risky? A fraud? A Ponzi Scheme?
Bitcoin has increased over 1,500% over the last year, but none of this is new. Cryptocurrencies have been on a tear unlike anything we have ever seen…just look at how it compares to the various bubbles of the past:
Full Disclosure: not calling it a bubble…just providing context!
Comparison of Bitcoin to Past Bubbles
But you…you are a savvy investor.
Outsized gains tell us nothing except something increased from a little to alot.
Total Returns are not adjusted for risk
Let’s take the following quiz…one is the right answer, but you won’t be graded for it.
Which of the following investments would you rather be in?
- Crypto A started at $1, went to $500, back down to $1, back up to $600
- Crypto B started at $1, went to $100, to $300, to $600
Both investments have the same return, but which would you choose?
I’ll give you some ti…oh you already have an answer? You choose #2?
Exactly.
Most investors look at total returns over various timeframes — one-day, one-month, one-year— when evaluating an investment. These returns are misleading since they aren’t adjusted for risk.
Just look at the example above —Crypto A made a massive return on the initial investment, but that does not mean it was a compelling investment opportunity.
“Using volatility as a measure of risk is nuts. Risk to us is 1) the risk of permanent loss of capital, or 2) the risk of inadequate return.” — Charlie Munger
If only there was a better way…
What is the Sharpe Ratio?
The ELI5 Version of the Sharpe Ratio
The Sharpe ratio is a measure used heavily in the finance world for calculating risk-adjusted returns.
The calculation solves the issue of misleading total returns by taking the average return earned above the risk-free rate per unit of volatility or total risk — an absolute measure of risk.
Investors can directly compare multiple investments and evaluate the amount of risk taken on to generate the same percentage points of return, which makes for a much fairer comparison.
While this does make for a much better comparison, you are smart and know that even though something may have a higher Sharpe Ratio, that does not indicate it is less volatile…the higher ratio actually indicated that the investment risk-to-reward profile is much better or proportional vs. another.
So for this article, I will show you how to implement the Sharpe Ratio in the wonderful world of cryptocurrencies.
Top Cryptocurrencies by Sharpe Ratio
With your new, sweet investment tool, you can calculate the Sharpe Ratios of top cryptocurrencies.
But because I love you (and to save time), I went ahead and did it for you:
Top 12 Cryptocurrencies by Sharpe Ratio
Not surprisingly, Bitcoin ranks as the top risk-adjusted earning cryptocurrency from the top 12. Even though Bitcoin is very volatile, the returns have matched the craziness.
What is interesting to me, is all the way at the bottom — our dear friend NEO, aka the “Chinese Ethereum”. A Sharpe Ratio of 0.03 in an industry of 1s, 2s, 3s, and a 4 is honestly…terrible. But a large portion of this is due to NEO stumbling out of the gate after getting listed on Bitfinex, with returns of -18%, -13%, and -24% in the first 10 days of trading.
My Gift to you — a tool to automatically calculate Sharpe Ratio
A post from me would not be complete without a tool for you to utilize what we just talked about.
The spreadsheet pulls in the top 12 cryptocurrencies from the Bitfinex exchange, and calculates the Sharpe Ratio for each.
The user can modify the risk free rate, calculations, and any of the currencies currently being pulled.
First time install
The tool is nice and simple to use. It requires about 2 minutes to setup, then after that you are good to go.
- Make of copy of the worksheet: Click Here
- Install the Spreadstreet Google Sheets Add-in
- Follow the instructions and log-in to the add-in
- Formulas in the sheet should update
RESOURCES
Download the add-in: http://ift.tt/2hSkYzU
Help: http://ift.tt/2yWC5eO
First time install and login:
https://www.youtube.com/watch?v=aLjtPR4T2bg
Bitfinex Candles endpoint help: http://ift.tt/2zBLTuH
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7 Smart Ethereum Price Prediction Methods for HODL’ers
ABOUT THE AUTHOR
John Young is the founder of Spreadstreet.io, former Financial Analyst for a big-ass company, and runner-up in the 6th grade spelling bee. He would have invested in Google if he knew about it...and had any money.
He is the author of the Spreadstreet blog, which has over 3 readers (not a typo). He hopes to hit 10, but honestly writing is a lot of work.
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