PlanB, the renowned Bitcoin commentator, has claimed that the Bitcoin Sharpe ratio is greater than one. Now, this is a rare feat to achieve in the crypto realm. As per PlanB, this is the only digital asset displaying such characteristics. Technically, the Bitcoin Sharpe ratio defines the increasing rate of return due to heightened volatility experienced while holding a risky asset class.
The eternal ‘Risk vs. Reward’ debate is centered on such parameters. The Bitcoin Sharpe ratio carries importance because most people rely on such simple statistical data to gauge an asset’s return. PlanB states that over time, the Sharpe ratio for BTC has improved so much as to classify it as an investment-worthy asset.
Understanding Bitcoin Sharpe ratio: What it means
Bitcoin Sharpe ratio can be better understood by comparing two assets over some time: one with minimal risk and the other with substantial risk attached to it. For example, a United States Treasury bill can be considered a risk-free asset as it is supported by the highly-trusted U.S. government.
Thus, the Sharpe ratio is the difference between the returns of volatile, high-return assets and the risk-free, low-return assets such as the U.S. Treasury Bills. It is this difference in return values that PlanB has calculated and stated that the Bitcoin Sharpe ratio is higher than one. However, this difference does not represent the asset’s volatility itself and only reflects the returns delivered by a particular asset.
PlanB further adds that Bitcoin has performed far better than the FAANG stocks that were the darling of the investors in the previous decade. What’s surprising is that he concluded his Bitcoin Sharpe ratio having skipped the Bitcoin’s initial price history. He didn’t use the price charts from the period 2009 to 2012 in his calculations.
Nassim Nicholas Taleb, author of the famous book ‘The Black Swan,’ doesn’t quite agree with PlanB. He says that the very term Bitcoin Sharpe ratio does not exist. He says that Bitcoin and Sharpe ratio has no correlation as the two cannot be connected in any sense.
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