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Bitcoin (BTC) Investors Shouldn't Be Fooled by High Risk-Reward Ratio

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Sun, 01/26/2020 - 22:40
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  • The potential returns of Bitcoin (BTC) greatly outweigh its risk but there's a catch

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Stock-to-Flow model creator PlanB recently revealed that Bitcoin is the only asset whose Sharpe ratio, which is used for determining risk-adjusted returns, is above 1. Thus, BTC significantly surpasses U.S. bonds, gold, and even FAANG stocks.       

However, he faced some criticism from on-chain analysis Willy Woo who pointed to the fact that Bitcoin, due to its relatively short history, cannot be compared to assets that have already endured one or more bear markets. 

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Upping the ante  

The Sharpe ratio was introduced by Nobel prize-winning economist William F. Sharpe to measure the returns of a portfolio while simultaneously taking into account its risk. A certain asset is compared to investments that are considered to be risk-free such as U.S. Treasury bills.   

Any asset with a high Sharpe ratio is an attractive option for investors because it can potentially generate extremely high returns. 

As the graph below shows, the Sharpe ratio is nearly zero for traditional assets such as U.S. bonds and gold since they have little to none volatility. The obvious downside of risk-free portfolios is that investors will not see any significant gains.

Bitcoin

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Not enough data  

In his response to Woo, the Dutch analyst wrote that applying the same time period to Bitcoin and other assets could potentially lead to 'practical challenges.' For example, if to take into account only 2018-2019 data, this would not include the 40 percent stock market crash in 2008 as well as the dot com bubble in the late 90s that was even more severe than the crypto one in 2018.

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Does it work for Bitcoin? 

Famed statistician Nassim Nicholas Taleb tweeted that the Sharpe ratio doesn't work for Bitcoin at all, which means that the above-mentioned comparisons didn't make any sense. Plan B agreed that it would be better to use fractal dimensions for his analysis. 

Taleb once reiterated that the variance of Bitcoin is infinite. In layman's terms, it means that Bitcoin cannot be overpriced.

Bitcoin
image by @nntaleb

What's your take on PlanB's chart? Feel free to leave a comment!         

About the author

Alex Dovbnya (aka AlexMorris) is a cryptocurrency expert, trader and journalist with extensive experience of covering everything related to the burgeoning industry — from price analysis to Blockchain disruption. Alex authored more than 1,000 stories for U.Today, CryptoComes and other fintech media outlets. He’s particularly interested in regulatory trends around the globe that are shaping the future of digital assets.

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  • Bitcoin (BTC) scammers know no quarantines or self-isolation. Dozens of fraudulent airdrops falsely endorsed by Bill Gates ask YouTubers to send in their Bitcoins.

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Typically, fake YouTube airdrops are quite similar to each other. With the current pandemic enraging across the planet, a series of scams that impersonate Bill Gates have some distinct features.

With Bitcoin (BTC) Price Drop, Scammers are Getting Greedy

Just like in several other previous cases, the fraudsters launch fake 'live streams' on YouTube, asking users to send in their Bitcoins (BTC) in order to get redouble the initial amount.  An 'entry ticket' into to this scam starts at 0.1 BTC which is more than $650. With previous scams, it was much cheaper.

Fake YouTube Bitcoin (BTC) airdrop
Image via YouTube

The scammers also publish the URLs of this campaign, which are linked to suspicious websites. Unlike previous cases, fraudsters launch multiple live streams simultaneously. At press time of this article, at least two of them were active.

Multiple scam streams on YouTube
Image by YouTube

According to statistics, the average popularity of one live stream is about 30,000 viewers.

Very Bad Idea

Alongside that, launching fake airdrops on behalf of Microsoft's Bill Gates isn't a slam dunk for the fraudsters. It may seem ironic, but Mr. Gates is a prominent critic of cryptocurrencies, particularly of Bitcoin (BTC). He is sure that digital assets represent a kind of a ‘greater fool theory’ type of investment.

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Cryptocurrencies kill, added Mr. Gates. To him, its only use-case besides short-term speculations is illegal funding for drug trafficking:

Right now cryptocurrencies are used for buying fentanyl and other drugs, so it is a rare technology that has caused deaths in a fairly direct way.

The U.Today team will one more time state that no airdrop will be conducted without the notification from an official website of a product or token. Any YouTube, Medium, and/or Telegram announcements may shill scammers. Never send your money to unknown persons.

About the author

 Blockchain Analyst & Writer with scientific background. 5+ years in IT-analytics, 2+ years in blockhain. Worked in independent analysis (Crypto Briefing) as well as in start-ups (Swap.online, Monoreto, Attic Lab etc.)

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