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The volatility of the cryptocurrency market was an argument against digital assets since it places more risk on investors' shoulders. Hence, it should be avoided. But according to the most recent data from IntoTheBlock, the two biggest cryptocurrencies out there, Bitcoin and Ethereum, are less volatile and more profitable compared to some stocks.
IntoTheBlock analysts created an automated tool for calculating the Sharpe ratio—a value that helps investors to evaluate risks and rewards. The ratio is calculated based on the portfolio's past performance. The high ratio is usually considered a good sign of risk/reward distribution.
Lower Returns, More Volatility - Contrary to popular belief, $BTC and $ETH have been less volatile than many stocks, especially those with crypto offerings
— IntoTheBlock (@intotheblock) April 15, 2022
The Sharpe ratio accounts for returns relative to price volatility. Here, most crypto companies match or underperform BTC pic.twitter.com/sV0QSsCR6J
According to the analysis provided by experts from the analytical firm, both Bitcoin and Ethereum were showing less volatility compared to many stocks, especially shares of crypto-related companies like Coinbase.
As the chart suggests, the Sharpe ratio for Bitcoin stays at -0.02 while the same ratio for Ethereum is at 0.04. Stocks, on the other hand, show worse or similar performance with digital assets, in contrary to popular belief.
Since the formula allows us to determine returns of the asset relative to its volatility, most cryptocurrency-related companies are matching or underperforming against Bitcoin and Ethereum, showing that exposure to the cryptocurrency market via crypto-related stocks may in fact be riskier than the direct purchase of digital assets.
While belief in the high volatility of cryptocurrencies has always been around, it may soon be non-applicable to cryptocurrencies, as the average volatility for assets like Bitcoin and Ethereum is rapidly dropping compared to previous years.
In the last three months, Bitcoin's implied volatility has reached a new low of 65%, suggesting that traders are not happy with the short-term performance of the first cryptocurrency and prefer avoiding active trading.
Yuri Molchan
Alex Dovbnya
