Cryptocurrencies may generate higher risk-adjusted returns than stocks and other assets traditionally thought of as “safer,” according to a new study from Yale University.
The study, named “Risks and Returns of Cryptocurrencies” was carried out on three major cryptocurrencies – Bitcoin, Ripple and Ethereum – by calculating the Sharpe ratio, a measure for the performance of an asset adjusted for risk and volatility.
The ratio provides a mathematical method to compare how different assets compensate the investor for the risk taken, making different assets more comparable.
The price data examined for Bitcoin was the most comprehensive, spanning from 2011 to 2018. For Ripple and Ethereum, the price data began in 2012 and 2015, respectively.
At the monthly frequency, the Sharpe ratios of bitcoin are similar to those of stocks for the comparable time period, although higher than the historical Sharpe ratios for stocks, the study found. Meanwhile, at the daily and weekly frequencies, the ratios are about 50% and 75% higher than those of stocks for the comparable time period.
The higher the Sharpe ratio, the better an asset is compensating an investor for the associated risk.
Below are the Sharpe ratios for Ethereum and Ripple, as presented in the study:
This Ratio Shows that Bitcoin is Better than Stocks 102
This Ratio Shows that Bitcoin is Better than Stocks 103
The two scholars behind the study, economist Aleh Tsyvinski and Ph.D. candidate Yukun Liu, further found that cryptocurrencies do not behave in a fashion similar to stocks, fiat currencies, or precious metals, and that it is therefore necessary to use other methods than those traditionally used to predict performance.
