Defining the best strategy for your cryptoassets
The usual strategies
Cryptocurrencies are a class of assets. Even the CEO of JP Morgan, Jamie Dimon, requalified the so-called ‘fraud’ as a ‘real’ asset.[1] As a man of finance, two key features accompany an asset: its return and its risk. Return is the reward for holding a given asset with a defined strategy.
Currently, most strategies are divided in two groups:
- Buy and hold, also known as buy and die
- Short term hoping
The first strategy defines a simple purchase, without much of insight, let it live and sell it eventually, many years later. Most of the time, the assets consist in mainstream cryptocurrencies such as bitcoin and ether. The second strategy is about selecting a range of cryptocurrencies, mostly in their early stages of existence, invest between three and six months maximum, then divest so as to surf on a new coin.
The statistical approach
Statistically speaking however, return expectations are not as high as they could. The website icostats hides a secret. While returns sky-rocket fairly easily, having a statistical approach dampens significantly the hype of cryptocurrencies returns. A significant proportion of crypto have a negative yield. Nevertheless, if one had invested in every single cryptocurrency without regular pre-sales discount, anexpected 12% return is observed over 2016. Taking into consideration 2017 with Bitcoin and Ether burst, the yield nearly doubles despite the significant number of ICOs (initial coin offerings).As a smart investor, you may be willing to use conventional finance tools. One of the simplest is called the Sharpe Ratio:
Where:
- Rcrypto: the expected return on a given asset, here a designated cryptocurrency
- Rbenchmark: the expected return on a benchmark asset, that can be a risk-free rate or 0.
- σportfolio: the volatility of the portfolio under consideration, computed as its standard deviation. The portfolio can be constituted of only one cryptocurrency
By this simple calculation, you are able to observe which cryptocurrency yields the most return by unit of risk taken.
Our research shows that past performance is highly correlated with future performance. The reason may lie in the strength of the network. The value of a cryptocurrency is explained by the size of its network, hence its participants/buyers. The more there are users, the more the cryptocurrency will gain in value.
Note however that it is a much better idea to possess a basket of multiple assets, because specific risk cancels each other. Therefore, we advise to purchase multiple assets to balance single asset idiosyncratic risk (specific risk associated to the selected asset).
[1] Source : http://www.independent.co.uk/news/business/news/bitcoin-latest-jpmorgan-ceo-jamie-dimon-fraud-cryptocurrency-blockchain-fintech-a8149981.html
Photo Credit: Splitshire
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