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Ethereum, TRON and Iota outperformed most of the other major cryptocurrencies from the 30-day Sharpe report, a measure developed by Nobel laureate William F. Sharpe to assess the return of an investment related to its risk. Meanwhile, Bitcoin's performance was sad.
In the last 30 days, the market has experienced a robust recovery after the end of December. One indicator, the Sharpe ratio, calculates the performance of an adjusted investment for the risk-free interest rate per unit of volatility.
To calculate the Sharpe ratio, first, the risk-free rate is typically determined using US Treasury Bills as a zero risk benchmark. Thus, over a period of time, the rate of return on an investment is calculated. The risk-free rate is subtracted from the investment return rate to produce the excess return amount. Finally, the excess return is divided by the standard deviation (volatility) to produce the Sharpe ratio.
(Average cryptocurrency yield – Risk free rate) / Standard deviation of cryptocurrency
The higher the yield compared to the risk-free return, the greater the Sharpe ratio. Even more consistent returns over time produce a higher Sharpe ratio. Meanwhile, a negative report indicates that the return on investment was lower than the risk-free interest rate in a given period.
For comparison, the US Treasury Bills have a zero Sharpe ratio. The S & P 500 Index, an equity index of the 500 largest US companies, had a 12-month Sharpe ratio rolling around 1.0 in the last 25 years.
Understandably, the cryptocurrency has a very low Sharpe ratio, sometimes even negative, due to its extreme volatility. The graph below shows the lifetime volatility of the bitcoin daily return rate compared to the S & P 500:
The chart highlights the extreme volatility levels encountered by bitcoins, even if compared to a moderately volatile index such as the S & P 500.
On 4 January, LongHash calculated the 30-day Sharpe report for various cryptocurrencies:
Ethereum and Iota generated Sharpe ratios of 0.124 and 0.127, respectively. TRON is in the lead with a ratio of 0.169. In the last month, Bitcoin reported a poor report of -0.0722, indicating that US Treasury Bills outperformed cryptocurrency in the last 30 days. These figures have little or nothing to do with the cryptocurrencies in question in the following months.
The fact that the Sharpe report has some relevance to evaluate the merits of a cryptocurrency is completely different. The new asset class is fairly new and volatile enough that the report may not provide any useful information, but we will let analysts in our audience make the final decision.
Disclaimer: The opinions of our writers are exclusively their own and do not reflect the opinion of CryptoSlate. None of the information you read on CryptoSlate should be taken as investment advice, nor does CryptoSlate approve any projects that may be mentioned or linked in this article. Buying and exchanging cryptocurrencies should be considered a high-risk activity. Please do your due diligence before taking any action related to the contents of this article. Finally, CryptoSlate assumes no responsibility in case of loss of money in the trade of cryptocurrencies.
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