Sharpe Ratio: Bitcoin's Performance Adjusted for Risk Was 'Dismal'

  • Ether (ETH), TRX, IOTA have all performed well in past 30 days according to Sharpe ratio.
  • Bitcoin (BTC) has performed poorly during same time period, even when compared to US Treasury Bills. 

Ether (ETH), Tron (TRX), and IOTA (MIOTA) have outperformed almost all other major cryptoassets according to the 30-day Sharpe ratio, a market assessment measure created by Nobel laureate William F. Sharpe. Bitcoin's performance relative to risk was "dismal."

The Sharpe ratio estimates the expected return on investment (ROI) relative to the risk of investing in a particular asset. The Sharpe ratio indicated that ETH, IOTA, and TRX, which saw its value surge over 11% after it was revealed BitTorrent’s is token launching on Binance’s Launchpad, performed well realtvie to risk, as reported by CryptoSlate.

In order to assess and project the performance of investments, the Sharpe ratio determines the risk-free interest per unit of volatility. The ratio’s risk-free rate is calculated by using US Treasury Bills as a zero-risk benchmark, and then determining the ROI for a certain time period.

S&P 500's Sharpe Ratio Has Been Stable For 25 Years

The excess (profit) return is calculated by subtracting the the risk-free rate from the ROI. Taking the excess return value and dividing it by the standard deviation in volatility gives us the Sharpe ratio for the investment. In other words, the Sharpe ratio increases as the rate of risk-free returns on an investment increases. Consistent returns over extended periods of time also result in a high Sharpe ratio, indicating that an asset is likely a good investment.

A negative Sharpe ratio indicates that the ROI was less than the risk-free interest rate during a particular time period. Last year’s Sharpe ratio for the S&P 500, an index that tracks stocks form the 500 largest US-based companies, was of about 1.0. This ratio has remained roughly the same for the last 25 years.

Cryptocurrencies Don't Yet Perform As Well As Traditional Assets

Due to their highly volatile nature and being a fairly new type of asset class, cryptocurrencies have very low, and in some cases even negative, Sharpe ratios. On Jan. 4, data journalism platform LongHash published the 30-day Sharpe ratio for several major digital currencies.

According to LongHash's calculations, Ether and IOTA had Sharpe ratios of 0.124 and 0.127, respectively, while TRX’s ratio was the highest at 0.169. In the past month, bitcoin had a very low ratio of -0.0722. Notably, US Treasury Bills have outperformed the flagship cryptocurrency in the past 30 days.