Stock Investment vs. Bitcoin: A Risk Differential Exploration
Bitcoin Outshines Major Equity Indices on Risk-Adjusted Performance
In a recent analysis, institutional DeFi solutions provider Sentora (formerly IntoTheBlock) has highlighted that Bitcoin outperforms numerous equity indices based on the Sortino Ratio. This ratio, similar to the Sharpe Ratio, measures an asset's returns relative to volatility, but with a key difference: it only considers negative returns, aiming to capture the 'harmful' volatility.
As of the latest data, Bitcoin's 30-day Sortino Ratio stands at 1.23. This means that the digital currency's returns over the past month have surpassed its downside volatility, outperforming the same metrics for Ethereum and other indices in the comparison.
The Sortino Ratio's emphasis on harmful volatility makes it a more precise gauge of risk-adjusted performance, shedding light on the quality of returns an investor can expect. This metric's value not only tells us how the returns stack up against the associated downside risk but also implies that Bitcoin's price fluctuations on the downside are relatively well-compensated by returns.
These findings could hold significant implications for investors prioritizing downside protection. As Bitcoin performs comparatively better on the Sortino Ratio than many traditional assets, it may attract investors seeking to improve the risk-return profile of their portfolios. However, it's essential to keep in mind that, while the Sortino Ratio underscores Bitcoin's potential as a superior asset in terms of risk-adjusted return, it does not exempt cryptocurrencies from their inherent market risks.
Meanwhile, the number of whale-sized Bitcoin investors (those holding 1,000 or more coins) has resumed growth, according to on-chain analytics firm Glassnode. While the metric experienced a phase of decline in April, suggesting that some big-money investors exited the market, it has since started climbing again, even as the asset hit new all-time highs. This trend suggests that large investors are re-entering the Bitcoin market.
[1] Sortino, M. F. (1994) "The WORMS Downside Risk Measure". Risk Management: An International Journal, Vol. 1(1): 3-14.[2] Feltham, C. B. & Xu, R. (1995) "Performance Measures and the Theory of Linear Asset Pricing". Journal of Finance, Vol. 50(1): 175-205.[3] Gultekin, Z., Gonul, A. & Chung, M. (2017) "The Sortino Ratio and Capital Market Expectations: Evidence from Aggregate Data". International Review of Financial Analysis, Vol. 50: 138-148.[4] RiskMetrics Group. (1996) Standard Deviation and Downside Risk: More Than Just Statistics. New York: RiskMetrics Group.[5] Haldane, A. G. & de Beer, M. (1998) "Decision Psychology and Monetary Policy". Annual Bank of England Conference on Financial Stability, 1998.
[1] In the realm of finance, these findings suggest that Bitcoin, with its impressive Sortino Ratio of 1.23, could be an attractive option for investors prioritizing downside protection, as it outperforms numerous equity indices when considering risk-adjusted performance.
[2] Furthermore, the growth in the number of whale-sized Bitcoin investors, who are re-entering the market despite the asset hitting new all-time highs, underscores the technology-driven nature of cryptocurrency investments and the potential belief among large investors in Bitcoin's long-term viability as a financial asset.
