Yale Economist Aleh Tsyvinski recently published a report in the National Bureau of Economic Research (NBER) that reviewed three digital assets — Bitcoin, Ethereum and XRP — in an effort to identify their basic properties and compare them to other asset classes.
As part of his study, Tsyvinski compared Sharpe ratios, a measure that indicates the average return minus the risk-free return divided by the standard deviation of return on an investment, between digital currencies and other asset classes. Surprisingly, Tsyvinski found that the Sharpe ratio for cryptocurrencies is slightly higher than for stocks and bonds, meaning the commonly referenced volatility should not dissuade the investor interest.
While this study was undoubtedly impactful in helping dissuade the overly-prevalent thinking that returns on digital assets are inherently more volatile than other asset classes, it did little to compare the relative volatility between notable cryptocurrencies and the overall market.
In order to begin to better analyze price volatility and risk within the cryptocurrency industry, we looked at data only recently available as crypto benchmark indices develop. For this report, we analyzed the beta, a measure of the volatility of a cryptocurrency, as compared to the AltDex 100 Index (ALT100), a benchmark index for large-cap cryptocurrencies and tokens.
Beta is calculated using a regression analysis, by dividing the covariance a cryptocurrency’s returns and the benchmark index’s returns by the variance of the benchmark’s returns over a specified period. As an example, we included our calculation for the beta of Bitcoin (BTC) relative to the ALT100 from July 8 to August 22.
A beta of 1 would indicate that Bitcoin’s price moves with the ALT100 while a beta greater than 1 would indicate that Bitcoin is theoretically more volatile than the index. However, as expected when comparing Bitcoin to an index containing the Bitcoin and top altcoins, Bitcoin’s beta came out to be 0.87, meaning the top digital currency is less risky than the overall market (the ALT100 in this case).
We extended this analysis to include other popular cryptocurrencies, including Ethereum (ETH), XRP (XRP), Litecoin (LTC), Binance Coin (BNB) and Nano (NANO). ETH and LTC were both slightly more volatile than the ALT100 with betas of 1.08 and 1.13, respectively. While XRP and NANO, which experienced a massive run-up in the last two weeks, have been more ‘sensitive’ than the market with betas of 1.17 and 1.74, respectively.
Notably, BNB has an even lower beta than Bitcoin at 0.78, meaning that BNB has been one of the most stable crypto investments in recent months. We separately reported last week that despite the downward market pressure, BNB has performed relatively well and is up around 15% this year.
This type of analysis, when conducted over a longer period, helps give investors a quantifiable metric on which to base their crypto portfolios and better understand the potential risk-reward of each cryptocurrency.
Disclaimer: This article’s authors have cryptocurrency holdings that can be tracked here and here. This article is for informational purposes only and should not be taken as investment advice. Always conduct your own due diligence before making investments.