Sharpe Ratio and Crypto – OKEx Blog

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

• 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.

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.

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.

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.

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 gold prices 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.

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.