Crypto markets and metrics

Nik Jacob

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Published in

VINPrimeCapital

4 min readJun 1, 2018

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Cryptocurrency performance evaluation using financial ratios

Bitcoin Performance

Since altcoins are heavily correlated with bitcoin performance, let us evaluate the rise of Bitcoin. Periods of pullbacks have always rebounded with consistent spikes to all-time highs. The majority of pullbacks are related to regulatory events or negative media.

The network has many challenges to overcome:

prohibitively high computational demands:
full nodes require large amounts of memory and bandwidth
can be practically limitations over low-bandwidth Internet
regular proof of work difficulty adjustments
increased mining power does not translate into increased block discovery times
thus, protocol (intentionally) does not allow for improvements to mining efficiency, hashing power, or block/transaction throughput
limited capacity for transaction volumes and throughput
non-user-friendly UI/UX
clunky, often command line, tools designed by, and for, software developers
market fractionation and dilution by scams
crypto-space is currently overwhelmed by misinformation and confusion propagated by scams, ICOs, and shitcoins

Despite its difficulties, scaling progress such as SegWit (larger blocks) and scaling initiatives (Lightning network) help sustain price momentum. Bitcoin has shown steady price resilience in the wake of setbacks. The chart below reveals technological progress reflected by higher TPS over time — the major technical hurdle related to TPS processing led to a plateau in bitcoin and a shift of investor funds towards altcoin investment, contributing to the 2017 year-end rally.

The altcoin spike, coupled with new speculators entering the market, let to rapid growth and added speculation, where global market capitalization rose to $800B, followed by a pullback to current levels of $350B.

Current market trends

As bitcoin is trending below the 200 day simple moving average (“SMA”), the cryptocurrency market is in bear territory per technical indicators.

We believe the pullback of the cryptocurrency market of highs from >$800B down to its current market capitalization near $350B is indicative of uncertainty around impending regulations, post-mortem from a period of incredible speculation (December 2017), and significant activity by media gateways such as Facebook and Google to limit advertisements of ICOs with the intention of protecting consumers. Many market participants anticipate a flight to quality in the ICO market as many new projects fail to demonstrate utility. In addition, bear markets are characterized by a flight to bitcoin as a safe haven, as reflected by bitcoin dominance (bitcoin market capitalization as a percentage of total cryptocurrencies). Bitcoin trading volume maintains steadiness, providing an indicator for support levels in price through the current bear market.

Cryptocurrency Performance Ratios

365-day returns as of March 31, 2018

Average returns

An analysis of annual returns for the top cryptocurrencies revealed significant outperformance against traditional assets.

Sharpe ratios

Sharpe ratios measure the excess return of an asset per unit of risk. The excess return is defined as the return of an asset minus the return of a benchmark asset. The risk is defined as the standard deviation of the returns.

Sharpe ratio formula:

Despite high volatility (generating standard deviation), cryptocurrency holders were rewarded with high returns generating greater Sharpe ratios than traditional assets.

Sortino Ratios

To complement Sharpe ratios, Sortino ratios measure the excess return of an asset per unit of downside risk. The risk is defined as the downside deviation of the returns since we are only concerned with risks related to losses.

Sortino ratio formula: