With the cryptocurrency market still in its infancy, there are many windows of opportunity for the right investors. Crypto investors, both individual and institutional, want to succeed in this volatile marketplace by maximizing their profits with the lowest possible risk. However, with a plethora of assets to choose from, it’s not as simple as trusting biased opinions that voice optimism one day and skepticism the next. Instead, investors need to focus on researching the potential assets they’re investing in and understanding their risk profile to ensure success. Here, we introduce new analytics, tools and resources that help crypto investors easily identify valuable asset candidates that contribute to building a stronger cryptocurrency portfolio.
Understanding Risk-Return Tradeoff
Technical data may seem daunting perceive without the right know-how. A risk-return plot is a simple way to visually see an asset’s performance relative to its volatility. In the following example, we will examine a historical plot from our market report of the mean daily return versus daily volatility for the top 50 cryptocurrencies between February 28, 2019 to March 28, 2019.
Figure 1. Mean daily return against historical daily volatility from February 28, 2019 to March 28, 2019.
a) Comparing Similar Assets
Let’s say we wanted to consider a return level just above 1%, how do we determine which asset to consider adding to our portfolio?
In Figure 1, the red line (1) shows that there are four assets that have mean daily returns slightly above 1%: Litecoin (LTC), OmiseGO (OMG), Basic Attention Token (BAT), and Ontology (ONT). Although the assets may have similar daily return levels, they do not share the same behaviour.
Next, we look at the diagonal blue line (2) in figure 1 and see which asset falls on the left-most side. Assets towards the left of the plot represent assets with lower volatility. Therefore, among the assets that offer the same level of return, Litecoin is the least volatile and the best choice out of the four to add to our portfolio.
b) Investigating Outliers
Riskier assets are found in the top-rightmost corner of the risk-return plot. These outlier assets represent assets that offer the highest mean daily return but are also the most volatile.
In Figure 1, the green line (3) shows that Tezos (XTZ) stands out. Tezos is a self-amending proof-of-work dApp platform that removes the need to hard fork when implementing protocol amendments. Although, higher risk investments may have the highest potential return, there is no guarantee. We can use real-time analytics from our Coinscious Terminal to look at Tezos’ performance for a longer duration of time and determine whether it’s worth adding to our portfolio or if it’s too risky.
Figure 2. Tezos (XTZ) return and risk table from: https://terminal.coinscious.io
From the table in Figure 2, we see that in terms of return, Tezos offers positive returns with price changes – constantly growing from one day to three months. The same table also shows that in terms of risk, Tezos’ volatility over one month and one year are both relatively low, and its price sits on the higher end.
Based on the data above, Tezos looks to be a favourable asset to add to our portfolio. We can deepen our understanding of by looking at performance analytics, trend sentiments, and indicator analytics featured on Tezos’ individual asset page (Figure 3).
Figure 3. Tezos (XTZ) performance analytics, trend sentiments and indicator analytics from: https://terminal.coinscious.io/details/XTZ/en
Tezo’s overall one-year performance and risk analytics identify: Sharpe ratio, alpha, beta, r-squared, mean return and volatility values, maximum drawdown, Value at Risk (VaR), and expected shortfalls. Trend sentiments help gauge Tezos’ trend momentums and moving averages over long periods of time. Indicator analytics are useful for discovering which strategy works best for this asset under performance metrics like Sharpe ratio, win rate and profit factor.
Together, all this technical data objectively shows an asset’s performance compared to its risk, and helps crypto investors determine whether they are good candidates to add to their portfolio or risky investments to avoid.
Realizing Cryptocurrency’s Potential
Crypto investors know there’s a huge potential for profit. However, overcoming the risks requires effort and planning. Reading the whitepaper to understand the problem a project is attempting to solve, identifying the team behind-the-scenes, and determining the uniqueness and prospect of a potential asset are fundamental steps to take. However, they only represent the first phase of much bigger learning curve.
In order to make the most of their portfolio, crypto investors need to digest a lot of historical and real-time technical data to grasp the full tradeoff between risk and return. By providing direct access to our team’s analysis, tools and accurate data, we make it easy for crypto investors to have all the necessary means to succeed. In doing so, crypto investors no longer need to rely on biased opinions that favour currently hyped assets. Rather, they can focus on building stronger cryptocurrency portfolios by choosing valuable assets based on data-driven insights.
Find out more about all the freely accessible tools and resources we highlighted in this article.
- This helpful guide is extracted from our CTO & Co-Founder, Daniel Im, and his presentation “Crypto Market Analysis, Analysis Tools & Data.” Watch the full presentation to discover how to detect suspicious exchanges and learn how to backtest strategies:
The information contained herein is for informational purposes only and is not intended as a research report or investment advice. It should not be construed as Coinscious recommending investment in cryptocurrencies or other products or services, or as a solicitation to buy or sell any security or engage in a particular investment strategy. Investment in the crypto market entails substantial risk. Before acting on any information, you should consider whether it is suitable for your particular circumstances and consult all available material, and, if necessary, seek professional advice.
Coinscious and its partners, directors, shareholders and employees may have a position in entities referred to herein or may make purchases and/or sales from time to time, or they may act, or may have acted in the past, as an advisor to certain companies mentioned herein and may receive, or may have received, a remuneration for their services from those companies.
Neither Coinscious or its partners, directors, shareholders or employees shall be liable for any damage, expense or other loss that you may incur out of reliance on any information contained in this report.