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Understanding the Math Behind Crypto’s Violent Ebb and Flow For anyone who has invested or traded in , they are well aware of just how volatile the value of cryptoassets can be. The volatility is largely due to simply being such a young asset class, but there are other factors that I will cover in this piece. Every coin has its share of drastic movement as crypto slowly crawls in the direction of mass adoption, and markets slowly attain thicker order books. But , and this sentiment is very much evidenced in the differences in how they are traded and how their values fluctuate in these early years. crypto cryptocurrency not all coins are created equal Large cap coins like Bitcoin and Ethereum are in price compared to some of the newer tokens out there with less liquid markets — like 0x, OmiseGo, Dash, or NEO. But in crypto, there are no real tokens that will shield you from major with the obligatorily mentioned exception of dollar-pegged stablecoins such as US Tether (USDT) or True USD (TUSD). There are several reasons why the markets are this way: comparatively stable — One large market order can drastically shift the value of a coin, due to the high amount of coins being traded in proportion to the overall small size of an entire exchange’s order book for that coin. The ability to shift values with one order also happens to be a large factor in why , which I’ve written about previously, is so prevalent in crypto. Order Books are Thin manipulation — As investors in a new space with very few fundamental resources to dictate a particular coin’s value, there really is of intrinsically valuing a cryptoasset. Yes, we can research innovation in how tokens are utilizing blockchain technology in more advanced ways than their peers. But for the most part, we simply rely upon future use cases and sentiment toward eventual real world adoption. Lack of Intrinsic Value no consistent way Cryptocurrency does not have any centralized overseers ensuring responsible trading and reasonable market fluctuations. Values are essentially created by what markets and sentiment make of it, and there is no FDIC backing to ensure crypto is traded within a reasonable pattern or range. Lack of Regulation — In addition to the above reasons, we also see other factors that usually don’t apply to traditional stocks, such as the lack of . Institutional investors are often needed in illiquid markets to create stability to prices of assets and commodities. They provide the heavy volume that is necessary to create substantially stable and high volume markets. According to at The Blockchain Journal, institutional investors Guillaume Belisle “A lot of high net-worth hedge funds or venture capital companies invest in the cryptocurrency market and are paying attention closely to what’s happening in the market. However, most of the big institutional investments are not made in the cryptocurrency market. Many financial institutions believe that the blockchain technology has potential on the long-run, but have not committed important sums of money to the market.” The of a particular coin (the magnitude of the deltas between its highs and lows, within a specific time frame) is actually relatively simple to measure. Just like we can use a stock’s to measure its particular level of movement vs. the overall stock market, we can measure any coin’s volatility on a percentage basis over any timeframe we so choose. By finding the high and low of any coin’s price within that period, then comparing it to the mean (average price), you can measure the difference of each extreme compared to that mean. Nope, not done yet. Then, you square those numbers (I promise this is easier than you likely think) and divide by the amount of total values you have in your dataset. To some, this may seem somewhere between to But don’t fear! There are freely available resources on sites like , which actually utilize standard deviation and volatility percentages of daily return. volatility beta “slightly daunting to calculate” “there’s no way in hell…” Level No, this isn’t a crypto trader. If it was, his mouth would be even wider. Many who have been in the space have felt a similar anguish. The massive swings that occur in crypto can undoubtedly be too much for many to bear. Photo courtesy of: https://www.businessinsider.com/cme-to-close-open-outcry-futures-trading-2015-2?r=UK&IR=T Now, a lot of people can mistakenly relate a coin’s overall strength as an investment simply by looking at how little the value of it wavers. If this were the case in traditional investing, then minimally moving assets like bonds would be every experts’ investment vehicle of choice. Many stray away from investing in cryptocurrency entirely after discovering that prices can potentially shift 10%, 20%, or even 30%+ in . Although there have been where significant swings have occurred in crypto’s highest market cap coin, Bitcoin, the presumption that jumps and dips like this happen is . a given day historic days on a daily basis false and greatly exaggerated Regardless, the swings that do occur are not for the faint of heart. The conservative, experienced traders out there who seek 4–8% gains per year from their old reliable stocks, bonds, and equities, ask why anyone would put themselves through this. The wild fluctuations that cryptocurrency requires its traders to tolerate seems completely nonsensical to the trader out there who is looking to safely make a small guaranteed profit on their investments year after year. But there are rewards for those who can stomach the swings of the cryptoasset roller coaster, and some of those rewards have been historically quite handsome. Particularly in the long run. Embracing Risk & Reward Through Breaking Down the Sharpe Ratio We have to remember that coin values can just as quickly as they can Investors who fear a coin investment loss of 20% in one month forget that there alternatively may be a 40% gain on the horizon in that same timeframe, which we have seen occur on in 2017 alone. With cryptocurrency still in its infancy stage, order books are thin and portfolios are consistently rollercoastering. If we are really looking to control our potential returns and losses to align with our risk tolerance, we need a metric like the to help lead us down the right path. move up fall down. multiple occasions Sharpe Ratio Think of prices like yo-yos that move up and down as a particular market attempts to dictate how valuable the asset is. Some of these coins have yo-yo strings significantly longer or shorter than others, and more stable coins simply can not reach as far upwards or downwards due to their shorter strings (lower volatility). These string lengths of various tokens depend on the market cap of the coin, as well as the size of their order books. This unsophisticated comparison demonstrates a coin’s historic and predictive range to move up or down in price over a given time. If only trading were as simple as dual-wielding children’s toys… Also, keep in mind that just about every coin moves in fairly tight correlation to the value of Bitcoin... Just in a more volatile version of that direction. This is largely due to the offered on most exchanges being mostly associated with Bitcoin. At some point, this may change. But for now, as investors, this is just something we need to accept when doing our research. Andrew Munro discusses diversification, correlation and mathematical ratios like Sharpe in his : trading pairs eloquently written article “In general, the risk reductions associated with diversification are dependent on the number of different asset types in a portfolio, and how closely correlated each of them is.” I have written about , and a very good thing to take advantage of on sites like . However, there are limitations to how much one can really diversify when most coins are moving relatively in the same direction. Diversifying in crypto largely correlates with having a well spread mix of large cap, mid cap, and small cap coins, then spreading them out based on your risk tolerance and, of course, your belief in their future adoption. diversification being a thing in crypto Level Since Bitcoin has the largest market cap in the crypto world, currently sitting at $109.3B, the volatility percentage has been and will consistently be the lowest or one of the lowest of any tokens you can trade. This is a good thing, particularly for the more risk averse traders out there. However, plenty of coins, despite higher volatilities than Bitcoin, have outgained it by wide margins over short-term and long-term durations. Don’t forget that volatility measures movement in . either direction This is why we, as investors, would ideally like to factor in overall return into the amount of risk we are willing to take. The Sharpe ratio, developed by William Sharpe in 1966, is a commonly cited metric in virtually every financial sector. It combines the amount of risk we are willing to accept for the expected light at the end of the tunnel (aka profit). With this in mind, let’s take a look at the 25 coins that currently offers on its trading platform: Samsa Keep in mind that at the time of this analysis (mid-August, 2018), cryptocurrency has been in an 8-month long bear market but has actually entered its . The chart above, which I created using provided metrics on their website, uses daily data from the previous 90 days of each respective coin’s market performance. During this past 90-day stretch, all coins on this list have lost anywhere between 0.2% and 1.3% of their values . Yep, not fun at all for us investors. We can see the return per day metric represented by the yellow area toward the bottom of the chart. lowest volatility era in 14 months Samsa’s per day At the same time, the volatilities (percentage range between highs and lows) of these tokens have wavered from anywhere between 3.2% in Bitcoin’s case and 8.2% in Nano’s case. This means that over these past three months, Nano has been a hair over . Represented by the blue area in my chart, we can see that this difference is quite significant. two and a half times as volatile as Bitcoin So with the knowledge that cryptocurrency has been hemorrhaging its value away more days than not for these past three months (and the majority of 2018), it would be safe to presume that Bitcoin has held up the best since mid-May, right? Well, surprisingly not. It is correct to assume that the least volatile coins will tend to hold up the best during negative return timeframes, but there are exceptions that may still thrive or stay on pace with safe haven coins during tumultuous times. As we can see from the chart, this was the case for Stellar (XLM), Ethereum Classic (ETC), and 0x (ZRX). In spite of heavy volatility, we can see from the Sharpe ratio’s grey line (which coins are sorted by from best to worst), that these three coins have higher ratios due to their microscopically better returns per day despite rockier volatility. In general, looking at these kinds of metrics and charts can really help traders understand that each coin comes with its own quantitative measurement of risk. And depending on that risk, it is vitally important to make sure that the potential return is worth it. So instead of basing your investments on which shillers are shouting the loudest and which coins have the most colorful logos, try looking at the Sharpe ratio as a way of gauging whether a coin is worth your time and risk tolerance strategy. If the volatility of a particular coin really is too worrisome for you and conflicts with your ability to sleep at night, think about it from a mathematical perspective. If a coin’s current fluctuations are about five times as large as a popular stock with an already high beta like , you could always just invest one-fifth in crypto of what you would otherwise in order to counterbalance for the heavier risk. Despite crypto’s enormous potential and ability to change the way the world transacts with each other, the lack of understanding its investment risk is one of the biggest barriers to entry. Only investing what you’re comfortable with and focusing on your returns in annualized returns instead of weekly and monthly is a great way to keep your head straight and make high-quality decisions with all of the choices of coins right at your fingertips. Amazon (AMZN) I write in depth cryptocurrency analysis at Level , the passive investing tool for crypto. See what we’re doing at Lvl.co and see our other analysis at our magazine . If you love what you see, give this article 50 claps! If you hate it, show your displeasure with 49. This article and related content is for informational purposes only. It should not be considered investment advice, and you should consult a financial advisor and do your own research and due diligence prior to making any investments. Where securities or commodities are referenced, it is only for illustrative purposes only, and does not imply any position on securities or commodities classification. To the extent that Level services are offered or discussed, those services are available only for Level whitelisted assets only.

What Cryptoassets Do You Need to Own? Leave It to the Sharpe Ratio

Passive Investing Comes in Many Forms When it comes to executing a proper trading strategy and staying consistent with plans of action for investing in , many people conveniently presume that the proper method to do so is simply what the crypto community refers to as . For those who stray away from the often confounding circle of crypto memes, this simply is a subtle reference and reminder to hold on to whatever coins you own. No buys, no sells. The hodler’s mentality is simply to hang on to your bags and let the volatility play out while patiently awaiting your deserved Lamborghini (cue eyeroll). cryptocurrency “hodling” Hodling mostly gets referenced as a reminder to , as they are during the time of this writing. And despite the vague tones of cringe in the intentional misspelling of a common four-letter word for the purpose of “lol’s”, this is actually a good message for true believers in the . not get scared off and sell your coins when times get tough in the markets blockchain Investors can get impatient watching the slow gains in their portfolios. Staying hands off can be easier said than done, but it is one of the keys to consistently winning. There is certainly a benefit to passively holding and tuning out noise in the markets. Avoiding kneejerk buy-high, sell-low reactions to large price fluctuations in any investment is one of the keys to making . After all, in the stock market, . According to Investopedia, major returns long-term day traders have historically gotten burned and have made significantly less returns than passive investors “Despite indexing’s track record, many investors aren’t content to settle for so-called . Even though they know that a minority of actively managed funds beat the market, they’re willing to try anyhow. ETFs (and index funds) provide the perfect tool.” average returns The above quote’s reference to ETF’s and index funds is still considered mostly to be a mirage in cryptocurrency, as many still presume that day trading is the only way to truly become rich while investing in an asset class that is so heavily volatile. However, it is a misconception that crypto index funds aren’t feasible and have no means to exist. They actually are very much a , and sites like are quickly gaining popularity for offering them to be invested in on a free or low fee basis. real phenomenon Lvl.co What is Rebalancing? Passive investing platforms like allow cryptocurrency traders and investors to select an allocation strategy that algorithmically “reshuffles the deck” of their portfolios in order to maintain balance according to the . Let’s first take a look at an untouched and non-rebalanced portfolio. Let’s say one year ago today, you first invested in cryptocurrency by buying an equal share in five different coins and your balance looked something like this: Level parameters they set $100 Bitcoin (20%) — $3,420 BTC/USD Price $100 Ethereum (20%) — $298 ETH/USD Price $100 Ripple (20%) — $0.19 XRP/USD Price $100 Bitcoin Cash (20%) — $304 BCH/USD Price $100 Dash (20%) — $204 DASH/USD Price $500 Total Portfolio Value As many of you know, a year in cryptocurrency can feel like an eternity, and an awful lot can change in a 365 day timeframe, such as Bitcoin exploding in an unprecedented bull run to a value of just above $19,700. During the time between then and now, Bitcoin notably hit a high of roughly its price from one year ago, and the value of Ripple went north of its initial August 9, 2017 $0.19 value at one point in early January, 2018. All of that being said, if you were to not touch your coins at all between now and then, your balance would read today as follows (numbers rounded for simplicity’s sake): 7.5 times 18 times $193 Bitcoin (24.3%) — $6,602 BTC/USD Price $124 Ethereum (15.6%) — $369 ETH/USD Price $184 Ripple (23.1%) — $0.35 XRP/USD Price $204 Bitcoin Cash (25.6%) — $619 BCH/USD Price $91 Dash (11.4%) — $185 DASH/USD Price $796 Total Portfolio Value Interesting stuff. Through the massive rise that cryptocurrency enjoyed in late 2017 and slightly less massive fall between January 2018 and now, this portfolio allocation untouched would have netted you a cool +59% return. Congrats! But take a look at how much the percentages of all of your holdings shifted. Your Dash holdings went from being worth because the market pushed it down. Meanwhile, the rest of your coins went up to varying degrees over the past year. 1/5th of your portfolio down to close to 1/9th No matter what your current stance on Dash is today, general investing strategy dictates that if all intrinsic values of these coins have stayed the same, we should be more Dash and some of our higher winners like Bitcoin, Ripple, and Bitcoin Cash with the assumption that they will even out in the long run. With rebalancing these assets along the way, we could have had an even higher return than the +59% we ended up with by selling the highs and buying the lows, while maintaining a more even spread of coins. Keeping a true 20% of each coin we initially invested in means selling our peaks and buying our dips in order to maintain our belief in this notion. buying selling offers traders the ability to keep their portfolio allocations protected and stabilized at the portion you would like to keep it pegged to. One coin’s allocation in a portfolio won’t diminish just because it has been outgained by another. automatically buys more of lower performing coins in order to capitalize when the markets turn! Lvl.co Level In such a volatile asset class like cryptocurrency, it is important to know that separations over time between two coins do not necessarily mean that one is now simply a more promising coin to own. It could just be a large divergence in value in a short or even long timeframe. Dash may have fallen to the wayside compared to Bitcoin Cash, but will it still be worth less than a third of Bitcoin Cash in a decade? Maybe, but it could also surpass Bitcoin Cash and leave it in the dust. That’s where your research comes in to play, and you can come up with a long-term strategy accordingly. In the latter scenario where Dash could surpass Bitcoin Cash, you may look back and kick yourself for not scooping up more Dash while it was cheap. Algorithmic trading platforms like can easily do that for you. Your initial plan from a year ago was to keep an even percentage allocation on both tokens since you believed in both equally. Why should your belief in Dash now only be worth 1/9th of your portfolio and Bitcoin Cash respectively now 1/4th just because the market dictated their values in those directions? This is the problem that has successfully addressed. Level Level A year long timeframe of how Equal Protocol Index (SEPR) performed against Bitcoin. Level’s So How Does Samsa Do It? takes care of this above scenario for you, and smooths over the proportion of your holdings periodically to keep this evenly spread allocation of your portfolio at 20% per coin. If the value of one cryptoasset goes up, takes those profits and puts them into a coin that has lagged behind. Once it catches up, the profits from the initial lagger are put into the new lagging coin. Rinse and repeat. And it’s all done automatically so that you can “set it and forget it”. This is an absolute luxury for busy investors who do not have time to reallocate constantly, and almost nobody has the time to do this optimally with the speeds in which coin values move up and down. Samsa Samsa The revolutionary trading platform allows traders to allocate their investing strategies however they want, and they are able to use recommended index funds with proven track records like . Alternatively, traders can customize their allocation to their own preferences, using the coins they want to trade, as well as the frequency in which to rebalance (eg. 2 hours, 4 hours, 1 day, etc.) Samsa’s Equal Protocols (SEPR) uses complex algorithms to periodically buy and sell your cryptoassets to maintain your own specified allocation of coins, whether through suggested index funds, or through your own custom allocations. According to CEO Chris Slaughter, Samsa Samsa’s “Rebalancing is the process of realigning the weightings of a of assets. Rebalancing involves periodically buying or selling assets in a portfolio to maintain an original desired . portfolio level of asset allocation For example, say an original target was 50% stocks and 50% bonds. If the stocks performed well during the period, it could have increased the stock weighting of the portfolio to 70%. The investor may then decide to sell some stocks and buy bonds to get the portfolio back to the original target allocation of 50/50. asset allocation “Rebalancing,” as a term, has connotations regarding an even distribution of assets; however, a 50/50 stock and bond split is not required. Instead, rebalancing a portfolio involves the reallocation of assets to a defined makeup. This applies whether the target allocation is 50/50, 70/30 or 40/60.” Passive Investing — The Way to Survive, Then Thrive What does it mean to be a passive investor in cryptocurrency? And how might traders benefit from more sound strategy via algorithmic technology to trade for them while they remain passive and enjoy their lives? Everyone would love to generate great returns in cryptocurrency, and nearly all of them would like to do it with the least amount of energy and time consumption. Groundbreaking ideas like are proving that not all passive investing strategies are created equal, and that you can do more while you hold on to your tokens for the long-term besides simply not touching your precious holdings for weeks, months, or years at a time. Level’s Keeping your tokens is easy to do when you can use an automatic rebalancing platform like Samsa.ai It’s quite easy to become complacent and allow the winners in your portfolio to gradually become larger and larger portions of your portfolio, while watching the losers become less and less prominent. However, assuming nothing has fundamentally changed with any of your assets, it is important to understand that those losing assets still have a great chance of catching up to the winners. In fact, your losers often have a better chance of higher gains than your winners moving forward. So it is helpful, no matter what kind of investment you are making, to rebalance your winners and losers to maintain their appropriate weighting allocation in your portfolio and capitalize on the ebbs and flows of the market. Taking advantage of the spikes and dips of various coins and constantly shuffling your deck of coins to best optimize the strategy you want is crucial to out there. Instead of constantly monitoring the charts yourself, looking for perfect entry points, and hoping your limit orders fill, let rebalancing platforms like do the work for you for practically nothing. Maximizing your gains and minimizing your losses while sticking with your investment strategy is a pretty sought after combination, and now it’s finally attainable. beat the competing traders Lvl.co I write in depth cryptocurrency analysis at Level , the passive investing tool for crypto. See what we’re doing at Lvl.co and see our other analysis at our magazine . If you love what you see, give this article 50 claps! If you hate it, show your displeasure with 49. This article and related content is for informational purposes only. It should not be considered investment advice, and you should consult a financial advisor and do your own research and due diligence prior to making any investments. Where securities or commodities are referenced, it is only for illustrative purposes only, and does not imply any position on securities or commodities classification. To the extent that Level services are offered or discussed, those services are available only for Level whitelisted assets only.

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