Talking about “alpha returns” and “beta returns” in the cryptocurrency space

Alpha returns and beta returns are two concepts that you often hear about in the investment process and are widely used to evaluate the performance of stocks, funds or portfolios.

Talking about "alpha returns" and "beta returns" in the cryptocurrency space

Alpha and beta returns are two concepts that are often heard in the investment process and are widely used to evaluate the performance of stocks, funds or portfolios. Alpha is used to measure the return of an investment compared to a market index, and beta is used to measure the volatility of an investment, indicating its relative risk.

The two names were originally derived from the work of Nobel Prize winner in economics William Sharpe’s 1964 paper, “Portfolio Theory and Capital Markets,” out of the fact that investors face systematic and unsystematic risks when trading in the market. Where systematic risk can be derived from the capital asset pricing model (CAPM) in the line of the securities market.

E(Ri) = Rf + βi [E(Rm) – Rf]

is defined as β, which is an index of the level of systematic risk borne by the security or the efficient portfolio. He therefore splits the return of a financial asset into two parts: the part that moves with the market is called beta return and the part that does not move with the market is called alpha return. The equivalent to the formula is.

Asset Return = Alpha Return + Beta Return + Residual Return

where the residual return is a random variable with a mean of 0 and can be omitted.

Understanding Alpha and Beta

First we need to define a market benchmark, corresponding to this market benchmark each financial asset will have a beta coefficient, to indicate the degree of volatility of this financial asset compared to the market benchmark. For example, if the beta is 1, it means that the financial asset is in line with the volatility of the market benchmark, and if the market benchmark rises by 10%, the financial asset will also rise by 10%; correspondingly, the return generated by the fluctuation of the underlying with the performance benchmark is called beta return. For example, if the benchmark rises 10% and the underlying rises 11%, the 11% is the beta gain. Beta return can be seen as a relatively passive investment return, that is, the return from taking market risk (benchmark down 10% underlying down 11%) (benchmark up 10% underlying up 11%). This return is generally not earned through active stock selection, timing, etc., but rather with the ups and downs of the performance benchmark (e.g., the broad market). Most of the passive index funds we hear about are this type of fund.

So what is alpha return. Following the formula above we know that

Alpha Return = Asset Return – Beta Return

What does this mean? Let’s give you an example. For example, a fund that tracks a benchmark that has risen 10% and has a beta of 1.1, the beta return is 11%, but the fund has achieved a 20% return through some strategies, the extra 9% excess return is the alpha return. We need to note is that this part of the alpha gain, is not related to market volatility (performance benchmark rose to generate fund returns for beta gains), this part of the return is the need for the fund manager through management, timing, stock selection and other means to obtain the excess return, the vast majority of active control funds in the market is the pursuit of alpha gains.

For better comparison and illustration, let’s make an analogy. For example, our speed when riding a train is actually equal to the speed of the train, plus our own speed relative to the train. The train itself drives fast, and we are naturally fast on the train, and when the train slows down, our speed also drops, and this is the beta gain. But we can also run forward in the train itself while the train is driving forward, which will also increase its own speed, this is the alpha gain.

In investing, people generally think that alpha is hard to get and beta is better to get. Because the market itself is fluctuating, and for investment, the beta coefficient can be easily changed by adjusting the proportion of positions (different portfolios), that is, to obtain the return from the market fluctuations. However, if you want to get alpha returns, you need to do it by timing and stock picking, which will test the investor’s ability.

Alpha and beta in cryptocurrencies

With almost a century of development in traditional finance, alpha and beta returns have been well researched. Cryptocurrencies, as an emerging asset that has only been in development for a decade, still has many immaturities. If stock market indices (such as the SSE) can be used as a measure of beta returns, then only BTC in the cryptocurrency space can act as a similar index at this time, for the following reasons.

the ratio of BTC to total cryptocurrency market capitalization is too large, even reaching over 70% during bear markets.

the correlation between the prices of other cryptocurrencies with larger market capitalizations and BTC is too high.

although there are some institutions that have launched some index products on their own, they are not well accepted by the market

A large number of investors use BTC as the denomination base.

This causes the volatility of BTC itself to become the de facto market benchmark, and therefore it is only necessary to hold BTC to obtain beta returns. If one seeks alpha returns, one needs to earn more than holding BTC in a bull market.

Alpha returns are derived from alpha strategies, traditional fundamental analysis strategies that favor currency selection and rely on selected sectors and portfolios to outperform the broader market. This approach requires investors to have high research and analysis skills, and is commonly used in foreign markets among hedge funds. In terms of specific strategies, they mainly cover.

  1. Long/short strategy, which is to buy some assets into the currency and sell some assets short. Hedge fund managers are free to adjust the market risk faced by the fund by adjusting the ratio of long to short assets, often to avoid the market risk they cannot grasp, to minimize risk and obtain a more stable return.

2, arbitrage strategy, is the two types of related assets at the same time to buy and sell the reverse transaction to obtain the spread, in the transaction of some risk factors are hedged out, leaving the risk factor is the source of excess returns for the fund.

3、Event-driven strategy, which is to invest in projects that are about to undergo special major events, such as spin-offs, acquisitions, mergers, mainline launches, version updates, hacking or pass-through buybacks.

4, Momentum trading strategy, through the market trend of the strongest pass for portfolio management, according to a certain period of time, constantly sell the least revenue pass, and then buy the rest of the market’s highest revenue pass, that is, the so-called strongest.


In terms of capital volume, the total market capitalization of the entire cryptocurrency market is currently nearly $2 trillion, which is still very small compared to the traditional financial market. On the other hand, the cryptocurrency market has its own unique characteristics: first, it is influenced by policies, and second, the market is filled with a large number of irrational retail investors. These two characteristics make it much easier to find alpha gains in the cryptocurrency market, which is why there is a myth of several hundred times of rise in each bull market.

Posted by:CoinYuppie,Reprinted with attribution to:
Coinyuppie is an open information publishing platform, all information provided is not related to the views and positions of coinyuppie, and does not constitute any investment and financial advice. Users are expected to carefully screen and prevent risks.

Like (0)
Donate Buy me a coffee Buy me a coffee
Previous 2021-06-04 00:38
Next 2021-06-04 02:03

Related articles