Interpreting portfolio performance

One year ago a single Bitcoin was worth around $ 130. At the start of the year, the value of a Bitcoin had increased to around $ 800, after peaking over more than a thousand in December. On April 10, 2014, the price had dropped again to around $ 350 before it started climbing to its current value of about $ 570.

Volatile investments

These movements indicate strong volatility, a measure for variation of price. Bitcoin’s current 30-day volatility is at roughly 17 percent, down from 36 percent a month ago. This means that, statistically, in 30 days there is a 32 percent chance that the value of a Bitcoin will have moved by more than 17 percent (either up or down). The 1-day volatility is at roughly 3.5 percent, down from 6.5 percent a month ago. For Dogecoin, the 1-day volatility even peaked over 12 percent. With numbers like these, it becomes possible to quickly win or lose a lot of money by investing in cryptocurrencies. If you could perfectly predict daily movements between various cryptocurrencies, you could be rich in no time. This is a tempting thought that motivates many people to start day trading, hoping to realize a quick gain.

Assessing performance

One thing that is often not taken into consideration when starting with this is that especially short-horizon returns are more likely to follow a random walk. In other words, good results from day trading are generally due to luck and not likely to last. The higher the returns, the more risk is usually involved. Incorrectly assessing portfolio performance in relation to the risks being taken can lead to some very disappointing results. The previous is why “alpha” is normally used to measure performance on a risk-adjusted basis. Alpha indicates the excess return (positive or negative) of an investment compared to a benchmark index. This can be any (optimally) diversified index or basket with an equal level of risk as the investment portfolio. A return of 10 percent on an investment with a volatility of 15 percent would still generate negative alpha if the benchmark would return 12 percent on equal volatility. Being aware of the risks involved, as well as being able to put returns it in the right perspective, can help avoid some disastrous outcomes.

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