Let’s assume I want to invest a certain amount of dollars in the 3 most loved cryptocurrencies in the world. How do I split my money between $BTC, $ETHEREUM and $XRP ?
Modern Portfolio Theory by Nobel Prize Harry M. Markowitz can help us to make a data-driven decision:
- Bitcoin: ~ 60%;
- Ethereum: ~ 25%;
- Ripple: ~ 15%.
This is the result I got analysing returns, standard deviations and correlations of the 3 target cryptocurrencies across the last 5 years. Particularly this portfolio configuration is the one that gives the investor the best return to risk ratio ever.
Return to risk ratio is calculated as the ratio between annualized average return and standard deviation and tell you the amount of return you can expect in a year from the investment for any unit of risk you are taking. The risk is computing using standard deviation, a well-known measure for volatility which basically tells you how much returns fluctuate around the average. Usually in finance the higher the risk, the higher the return.
But the higher the return to risk ratio, the better! For a similar level of risk, you should search as much extra-return as possible. Return to risk ratio of your portfolio can be improved with low correlations. The correlation is a measure that ranges from – 1 to + 1 and tells you how returns of two instruments are linked and to what extent. Negative correlation, for example, means that when the first instrument goes down, the second goes up. This is a good thing for the risk of your portfolio because you can eventually compensate the losses of an investment with the profits of the other one.
Looking only at return or risk, we have that Ripple > Ethereum > Bitcoin. But if we take into consideration both through return to risk ratio we get the opposite: Bitcoin > Ethereum > Ripple. Thanks to correlations lower than 1, we have therefore managed to combine the 3 cryptocurrencies in a way to build a portfolio with quite the same return of Ethereum but a risk similar to the one of Bitcoin. As result, we have achieved the best return to risk ratio possible.... Show More
Not investment advice. The author may have financial interests in the mentioned instruments.
scusa giuseppe posso chiederti una questione tecnica fiscale?Dal 2019 ho un conto etoro ma non l'ho mai messo in dichiarazione.Leggo che bisogna fare il modello RW .Cosa devo mandare al mio commercialista per farlo?e per gli anni non coperti dovrei fare un ravvedimento operoso? ... Show More Translate
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