Can you beat the market? — Some learnings on cryptocurrency
Disclaimer: I’m no expert in cryptocurrency, so please don’t treat it as investment advice.
Traditional views in finance believe that cryptocurrency has zero value. This theoretical framework is known as CAPM (Capital Asset Pricing Model), and it has been trusted by many, as an effective approach to estimate the value of securities based on the financial market. It states that currencies (no matter it is bank notes or digital currency) as a form of exchange has no underlying values hence investors should hold as less as possible of them. While this is the belief of many people, we cannot help looking at what the data is telling us. We want to know whether there exists miracle millionaires incubated from the crypto storm, and how they profited from the hype.
Take a look at the daily prices of BTC, ETH and XRP from the past 7 years. Suppose you are to invest 1 dollar every day, your expected return would be the percentage change of the daily price. We get:
The expected return of these coins are actually doing pretty well. However, frequentist thinking doesn’t always prevail in the financial domain. Looking at the median of the expected return, this is what we find:
Hence, the revelation- On most days, you will lose money on XRP. So how do people win over crypto? No need to look further than the distribution of itself.
On most days, you will lose money. However, you might be lucky to earn a lot of money on a particular day, and the odds of you wining money is 1 to 20,000, which is way higher than the odds you wining a powerball lottery (good news), slightly higher than the odds of you finding a four-leaf clover, but lower than the odds of you being audited by IRS, and way lower than the odds of you being a ambidextrous. — source
However, more and more people dip their noses in this technology, as seen in the number of active addresses increases despite several price plunges (the latest one is around July, 2021).
So would you like to take a bet?
