Adjusting for risk, which coins proved to be the best investment? The Sharpe ratio reveals

One of the hallmarks of the anti-crypto sentiment is that digital assets are incredibly risky.

Perceived market volatility has been a huge barrier to entry for both hobby and institutional investors, and it gets re-validated with each new BTC swing. Take a guess: in the last 3 months alone, how many times has Bitcoin dropped by 10% or more within 24hrs?

Answer - it was 6 times:

However - that’s just half the story. Some investors will be ok with taking higher risk and riding the crypto rollercoaster, as long as the payout’s worth it. So now guess how many times BTC went up by 10% or more within 24 hours in the last 3 months?

Answer - it was 7:

So while crypto is volatile, if the returns are high enough, the elevated risk could be considered acceptable - at least for some investors.

This is what the Sharpe ratio helps us determine - when we adjust for risk, are a coin’s returns ‘worth it’?

What is the Sharpe ratio?

The Sharpe ratio is a way to analyze the performance of an asset by adjusting its returns based on how bumpy the road was to those returns.

Investors are always looking that their returns outweigh the associated risks. Risk, at least within the Sharpe ratio, is the same as general volatility, i.e. the amount and frequency of the coin’s up- and downswings, or deviations from the mean.

When considering an investment, most people want one of these conditions to have been met in the past:

1. The risk is low but the returns have been high

2. The risk is moderate but the returns have been even higher

3. The risk is high, but the returns have been sky high

What we’d like to see is that a coin has a high Sharpe ratio, because it’ll confirm one of these conditions has been fulfilled in the past. It doesn’t actually reveal which one, but given the crypto market’s volatility, we can be fairly certain it’s door #3.

Of course, it’s important to say that past performance doesn’t have to be indicative of future performance. That said, if you’re a risk-conscious investor, you probably want to know not just how a coin performed - but how crazy the ride was to the end point.

How to calculate the Sharpe Ratio of Any Coin

To analyze risk in crypto, we made a Google Spreadsheets template that calculates the Sharpe ratio for any coin in our database. You can find it here.

The template was built with Sansheets, our new plugin for importing Santiment’s on-chain, social, pricing and development data into Google Spreadsheets.

The way it works is simple: just select a coin you’re interested in at cell C20 to calculate its Sharpe ratio since January 1st, 2017. (note: if you want to change the time frame, make a copy of the sheet and download the Sansheets plugin).

There’s still some debate as to what constitutes a ‘good’ Sharpe ratio; in this case, our template uses a simple evaluation method:

• Below 1 is bad
• 1-2 is acceptable
• 2-3 is good
• 3+ is perfect

Armed with this data, here’s a few things we learned playing with our new Sharpe ratio template.

And the best Sharpe ratio goes to...

Since the start of 2019, the highest Sharpe ratio of top 10 cryptocurrencies belongs to:

*drumroll*

Binance Coin, with an impressive Sharpe ratio of 2.63. Next up is:

2. Bitcoin (2.37)

3. Litecoin (1.49)

4. Bitcoin Cash (1.26)

5. Monero (1.17)

The worst Sharpe ratio in the top 10 coins YTD goes to XRP, at -0.35 (yes, that’s minus 0.35). This indicates high volatility and poor returns relative to Ripple’s price swings.

Here are the top 100 cryptocurrencies by Sharpe Ratio YTD (looking only at the coins that made top 100 at some point):

For more context, our template also lets you calculate a variation of the Sharpe ratio called the Sortino Ratio, which only takes into account downside volatility. The premise here is that most investors will actually welcome upward spikes - no matter how big - so those are omitted from the Sortino ratio.

In other words, the Sortino ratio only analyzes the size and volume of the coin’s downswings relative to its returns.

The valuations are a bit different than for the Sharpe ratio, but once again, the bigger the better. Here are the top 100 cryptocurrencies for the Sortino Ratio YTD:

While BNB is still the top dog, we can see that compared to the Sharpe ratio, Bitcoin in fact overtook Chainlink, indicating that - looking only at the negative swings - BTC performed better overall than LINK.

This is the reason why some prefer the Sortino ratio; our template automatically calculates both Sharpe and Sortino ratios to save you the hassle.

If we zoom out a bit and look at the Sharpe ratios of the current top 10 coins going back to January 1st, 2018, the results get a bit more flattened out. BNB would still lead the charge at 2.21, followed by:

2. Ethereum (1.53)

3. Ripple (1.44)

4. Bitcoin (1.42)

5. Litecoin (1.35)

Here are the top 100 cryptocurrencies by Sharpe Ratio from January 2018 onwards (looking only at the coins that made top 100 at some point):

We can see the list change quite a bit compared to the YTD rankings. Surprisingly, it’s B2BX that takes the crown as the high-cap coin with the best Sharpe ratio in the past year and a half, followed closely by LINK and, again, BNB.

Within the top 100 coins by this measure, Bitcoin falls to #17, Litecoin to #36, and Ethereum to #55.

For those that don’t care about upside volatility, here’s the top 100 cryptocurrencies by the Sortino ratio from 2018 onwards:

In both cases, B2BX, LINK and BNB top the list, indicating the coins proved a prudent investment even when only accounting for downside volatility. Other top coins are similarly ranked: Bitcoin at #16, Litecoin at #37 and Ethereum at #57.

In the end, it’s worth reiterating that past performance will only take you so far, but being conscious of previous risk-to-return performance is a no-brainer: especially in crypto. You can check out the template here.

To make your own crypto templates with a few basic functions, download Sansheets at sheets.santiment.net