When you are dealing with cryptocurrencies and its financial ecosystem, one has to be calculative and consider volatility and major price swings as an important factor before making any investments.
Sharpe Ratio, a measurement tool which is regularly used in the traditional financial markets, allows traders and investors to assess the return on investment in comparison to the risk involved.
In a recent blog post released by OKEx exchange, it explained how the tool was essential in analyzing the risk involved while investing in virtual assets.
In the last few years, more investors have started to use Sharpe ratio to have a better understanding of risk associated with cryptos. The post explained that Sharpe ratio of a virtual asset measured the return of investment per unit of deviation in a financial asset to identify trading strategy involving the risk.
A ratio of 3.0 or higher was considered extremely positive, while a negative Sharpe ratio would indicate that the risk involved in the asset fairly surpassed the profit associated.
According to the post, out of the all the major-listed coins on OKEx, surprisingly IOST had a 30-day Sharpe ratio above 2.0 however, IOST had a negative ratio over a 90-day period which indicated higher risk in the long term.
It was also reported that BTC had a positive 90-day Sharpe ratio which was recorded to be 1.59, while XRP had a negative ratio over a 90-day period which indicated that BTC was a better investment on paper.
The Sharpe ratio is beneficial in evaluating risk of an asset but it does not dictate price movement of a virtual asset.