This article investigates the question "What sort of volatility has accompanied the returns of the top digital currencies in 2017?"
There is typically a trade-off between risk and return. To accept a higher risk we expect to be rewarded with a higher return. For example, government bonds are generally less risky than equities but the return from bonds has been lower than equities (on average) when you look over a long period of time.
I wanted to compare the risk and return based on daily price data for the top 50 currencies in 2017. My measure of volatility is the relative standard deviation [the standard deviation(price)/average (price)]
The first table below shows the currencies I have included in the analysis and the volatility and returns for the year to date. You will see that Ripple has had the highest returns but also the highest volatility. Bitcoin has one of the lowest volatilities in the group (which is not surprising given it's much larger market cap over the period).
In terms of making an investment choice based on risk and return, an investor will always choose an investment with a lower volatility if the return is the same. This brings me to the graph below the table. This shows the a scatterplot with return and risk plotted for each of the currencies in the table. You will see that the currency "Decred" has had a comparable return to "Ripple" but the volatility has been much lower. Does this mean that Decred is a better investment for the future than "Ripple"? Not necessarily but given the advantage of hindsight, it would have been a better choice for the year to date.
We are naturally more interested in returns but volatility is a very important consideration that needs to be borne in mind when making an investment.
I plan to dig deeper into this subject so this is just an introductory note.
Thanks for reading and enjoy the weekend.
