Cryptocurrencies and other financial assets often come up with returns. In this direction, we see that the interest of investors increases as the price of bitcoin increases. Therefore, it is possible to say that the return is very important in terms of investment decisions. But we need to calculate the risk along with the return. Risk can be perceived as a loss, but it is volatility. If an asset with a high return also has a high volatility, it does not mean that it is definitely the right investment. For example, let’s say that the return of financial asset A is equal to financial asset B at an annual rate . If A is more mobile than B, it makes more sense to rationally choose financial asset B . So, how much more does A earn than B, the more advantageous it is? For this it is necessary to calculate the returns per each risk. That is, the sharpe ratio.
The Sharpe ratio is calculated by dividing the return by the volatility. This ratio gives us how much return one unit of volatility will give. Thus, it allows us to make the most logical choice according to the risk when making a basket (portfolio). Bitcoin has appreciated by 63 percent as of May 1, 2019. Ethereum gained 31 percent. A professional investor doesn’t just invest by looking at returns, he immediately looks at his returns based on his volatility and makes the most logical choice.
While the sharpe ratio of bitcoin is 1.03, we observe that the ratio of ethereum is 0.81 and that of litecoin is 0.083. Bitcoin has a better return per volatility than ethereum, and ethereum has a better return than litecoin. If your risk appetite is normal, bitcoin may make more sense for you. However, it is possible for a risk-taking investor to buy and sell more often and earn more returns from the volatility in altcoins.
Bitcoin has returned quite a lot in the last two days. Through the graph below, let’s look at how often we encounter this throughout the year.
As you can see from the chart, this return in the log is not very common. However, we cannot say that it has never happened before. Bitcoin had returned 16.76 percent at the daily rate with the news from China on October 25. The next day, it returned 7 percent. Although 7 percent is also a lot compared to 15 percent, it is not a very common return in the day. The reason for this is that there are clusters in financial markets. So big movements follow big movements, small movements follow small movements. For this reason, it is possible to say that the coming days will continue to be active for bitcoin. Hard withdrawals can be considered normal. For upward movements, stock markets should be monitored and statements of central banks should be followed.
