Crypto risk metrics

Measuring crypto volatility and Sharpe Ratios

Cryptocurrency prices are notorious for large upward and downward swings. In this post I discuss 2 crypto risk metrics - volatility and Sharpe ratios.

Volatality

Volatility measures the price fluctuations of a crypto.

If a crypto has a higher volatility, its value can be spread out over a larger range. The value of volatile cryptos can massively change in a short period. Conversely, a crypto with lower volatility is likely to be stable and subject to smaller swings.

Volatility is usually measured using variance and standard deviation.

The chart below displays the volatility of 4 cryptos:

  • Bitcoin (BTC),

  • Ether (ETH),

  • Tether (USDT), and

  • Ripple (XRP).

The volatality is measured over 4 periods:

  • last 30 days,

  • last 90 days,

  • last 1 years and

  • last 3 years.

Source: Future Money Wallet

Sharpe Ratio

Sharpe Ratio is the average return earned in excess of the risk-free rate per unit of volatility. While calculating the ratio, we subtract the risk-free rate from the mean return. This allows us to calculate profits associated with the risk-taking activity.

The risk-free rate of return is the return on an investment that has zero risk e.g. a Treasury bond.

A positive Sharpe Ratio implies that the returns are higher than the amount of risk.

The chart below displays the Sharpe ratios of 4 cryptos:

  • Bitcoin (BTC),

  • Ether (ETH),

  • Tether (USDT), and

  • Ripple (XRP).

The Sharpe ratios are measured over 4 periods:

  • last 30 days,

  • last 90 days,

  • last 1 years and

  • last 3 years.

Source: Future Money Wallet