Crypto Portfolio Performance Evaluation - Understanding the Strategies

Assume you have a portfolio of cryptocurrencies. How could you tell whether or not they are doing well? One of the most important components of investment analysis is portfolio performance evaluation. Performance outcomes can be used to evaluate the effectiveness of the investment strategy and recommend modifications that can enhance it. No matter how different your assets get, constantly checking that they still adhere to the standards you initially established is not enjoyable.

But with a little knowledge of why it's crucial to assess portfolio performance and a step-by-step manual on how to do it, we believe we can change it from a nuisance to something you don't mind doing occasionally.

Portfolio Performance Evaluation - Best 7 Strategies

You must select some strategies for a more accurate portfolio performance evaluation. Investors must also decide on the frequency of monitoring. For instance, quarterly monitoring is a typical frequency for any investment or portfolio (every three months). Total return, which is typically assessed against a benchmark, is the main performance monitoring statistic for portfolios. Statistical risk measurement techniques including Standard Deviation, Beta, R-Squared, Sharpe Ratio, and Sortino Ratio are among the additional metrics.

1. Comparing With Benchmark

You can track the performance of individual investments or the entire portfolio. In the traditional market, comparing a period's profits to a benchmark is common practice. And the bitcoin market is a place where the same rules apply. The return of an asset relative to a selected benchmark is measured using the performance indicator known as alpha.

Total Market Capitalization is the most often used benchmark in the cryptocurrency market (TMC). The indexes suggested by large funds and research organizations that provide a clear picture of the market's overall direction are also taken into account by traders.

Suppose, Portfolio value (a month ago) = $15000

Portfolio value (present-day) = $18,600

Total Market Capitalization (a month ago) = $170,000,000

Total Market Capitalization (present-day) = $188,000,000

Percentage increase in portfolio = [($18,600 – $15,000)/$15,000] x 100 = 24%

Percentage increase Total Market Capitalization = [($188,000,000 – $170,000,000)/$170,000,000] x 100 = 10%

Alpha = Percentage increase in portfolio ~ Percentage increase in Total Market Capitalization

~ (difference) – subtract lower value from higher value

Alpha = 24% – 10%

Alpha = +14%

Consequently, a positive alpha value means that the trader's portfolio fared 14% better than the market cap as a whole.

2. Standard Deviation

The standard deviation of an investment or portfolio measures its volatility. A higher standard deviation, for instance, denotes greater price variance or volatility compared to average performance. Many investors use diversification techniques by investing in a range of assets to lower volatility in a portfolio.

3. Beta

A statistical risk gauge known as beta assesses an investment's risk about a market benchmark. The market's beta will always be 1.0. An investment is more volatile than the market if its beta value exceeds 1.0, and it is less volatile than the market if it is below 1.0.

4. Sharpe Ratio

Let's take a closer look at the ratio's expression before discussing what it means for crypto assets:

Sharpe Ratio =(Rp – Rf)/σp

Where:

p: The particular portfolio of financial assets

Rp: The return expected from the portfolio

Rf: The risk-free rate of return, such as the government bond rate

σp: The portfolio’s risk, with the variance (sigma), expressed as the returns’ standard deviation

Sharpe ratios above 1.0 are typically seen as satisfactory, and portfolio values above 2.0 are regarded as excellent. Ratios exceeding 3.0 are astounding—and incredibly rare.

Any number less than 1.0 is not optimum. A negative value, which corresponds to a negative return on investment, means that the portfolio manager would make more money if they sold their holdings and bought U.S. Treasury bonds instead.

The Sharpe ratio calculates the excess return over the risk-free interest rate. The ratio aids investors in determining whether larger returns result from wise investing choices or from taking on too much risk. The Sharpe ratio shows which portfolio involves higher risk even when two portfolios may deliver comparable returns. Comparison of Sharpe ratios aids investors in finding the best combination of higher returns and reduced risk.

5. Sortino Ratio

An alternate formula for the Sharpe ratio is the Sortino ratio. It gauges the returns on investments or strategies after adjusting for risk. It only takes into account returns that are below a user-specified objective or needed rate of return, in contrast to the Sharpe Ratio. It provides a more precise assessment of the potential for underperforming investments.

The Sortino Ratio's formula is as follows: 

Sortino ratio = (R) - Rf /SD.

R = Actual or expected return of e.g., investment

Rf = Risk-free rate of return

SD = Standard deviation of the Negative Asset Return

In general, the Sortino Ratio should be higher. Simply put, this indicates that the investment's hazards or high payoff are both present. Sortino ratios of two and higher are regarded as desirable. Always choose the investment with the greater Sortino Ratio when comparing two potential investments. A low Sortino Ratio indicates that the potential investor might not be compensated for the investment's inherent risk.

6. Treynor Measure

The Traynor Index shows the amount of return an investment generated relative to the degree of risk it involved. A portfolio is a better investment if its Treynor Index is greater. An investor receives a certain number of units of reward for every unit of volatility they experience, which is fundamentally expressed by the index, a performance metric.

The Treynor Index's underlying principle is that to portray an accurate picture of performance, investment results must be adjusted for risk.

Investors should be aware that they shouldn't base all of their investment selections solely on one ratio. The Treynor Index is based on past data, which makes it even more crucial to note that the data it gives does not necessarily predict future performance.

The formula for the Treynor Index/Ratio is: Treynor Ratio= (PR - FR)/ PB

Where, PR= Portfolio return

RFR= Risk-free rate

PB= Portfolio beta

7. Jensen Measure

Jensen's measure, sometimes referred to as Jensen's Alpha, is a measurement of the portfolio's excess returns over returns predicted by the CAPM model. The letter ɑ represents it.

The excess return's value might be either positive, negative, or zero. The CAPM model itself offers risk-adjusted returns, which account for the security's risk. As a result, the security's actual returns will match CAPM if it is priced fairly. In this instance, the Alpha will be 0. However, the security will have a positive Alpha if its earnings are higher than its risk-adjusted returns. A portfolio that has a negative alpha has not generated the necessary return. Portfolio managers always want to see a greater Alpha.

The formula, ɑ = R(i) - [R(f) + B * {R (m) - R (f)}]

Where, 

R(i)= realized return of the investment

R(m) = realized return of the appropriate market index

R(f) = risk-free rate of return for the period

B= Beta of the investment concerning the chosen market index

What is Portfolio Evaluation

A cryptocurrency portfolio is a compilation of the cryptocurrency that you possess. Portfolio evaluation is precisely what it sounds like. It involves periodically examining your investment assets to make sure they are fulfilling your preferences and performance goals, whether they are focused on diversification, inflation hedging, return generation, personal values, etc. A diverse selection of cryptocurrencies with a range of use cases and risk appetites make up a well-balanced crypto portfolio. Therefore, regular assessment can help you understand what's happening and what you should change to achieve better outcomes. It may sound difficult and crucial to do. But believe us when we say that the effort will be worthwhile.

Why is Portfolio Performance Evaluation Important?

There are several reasons why every investor should do portfolio performance evaluation and periodically review their investment approach. However, why should you do it?

Make Sure Assets Are Performing at Their Best

One of the main reasons is that it's essential for evaluating the performance of each of your carefully chosen assets!

You'll be able to swiftly determine which assets are performing well and that you might want to invest additional money into when you regularly analyze your portfolio. Or, you could elect to withdraw from investments that are wasting your money and yielding little in return.

Discover the Causes of Changes in Portfolio Value

Observing abrupt increases or worse decreases in portfolio value?

You won't know where those changes are coming from if you don't make the time for investment management. To maintain a balanced portfolio, it's critical to be able to spot the assets that are shaking things up, whether in a good or bad way.

Decide Where to Make Room in Your Budget for New Investment Opportunities

Amazing brand-new investment chance just appeared?

Do you have a thorough idea of how your portfolio is doing? If not, it will be difficult to determine if you are ready to seize it or not.

If you want to seize the chance, you'll know right away which investments you can liquidate to raise the funds, thanks to an organized view of your assets.

Diversification Will Safeguard Your Portfolio

Speaking of fresh investment chances, they can occasionally appear in completely uncharted territory that is unfamiliar to your investment portfolio, allowing you the option to diversify.

Since the majority of these asset classes are not correlated, they work together to keep the value of the portfolio steady even when one sector's value falls sharply. In this way, diversification shields investors from severe and protracted capital losses.

Get a Trustworthy Net Worth Reading

Investors, and really anyone, can use net worth as a single statistic to monitor their financial well-being.

Therefore, keeping track of your net worth is just as important as keeping track of other things, like your heart rate. Normally, you want to see this figure rise over time since that shows your “health” is becoming better.

An in-Depth Guide For Portfolio Performance Evaluation

Are you pumped and prepared to discover how to assess and track portfolio performance evaluation? Let us provide you with a simple, step-by-step manual that you may use moving forward whenever you require a new assessment of the performance of your portfolio.

• ‍Step 1: Let's discuss the various factors you can specify before we go into the specifics of how to assess relative performance. For many individuals, these will seem different. For instance, if you have a long time before retirement, consider investing in assets that may not seem appealing at first in the hopes that they would appreciate significantly over time. Investors who want their assets to produce consistent, reachable income are on the other side of the coin. Then some support investing. Then some investors are experts at making quick purchases and sales of assets to make a profit right away. So, the assessment process won't be the same.‍

• Step 2: Regularly assess your current net worth, especially the value of your investment portfolio. The first step in determining how well you're doing overall is understanding where you stand.‍

• Step 3: Compare the performance of your portfolio against its benchmarks. Everything in the marketplace is relative. If your investments are performing at least as well as their respective indices, you're doing very well. Check the performance of each asset type in your portfolio against its corresponding index. And if there are any differences, determine why.‍

• Step 4: Comparing each investment in your portfolio to others in the same asset class will help you understand how they stack up. Each of your funds or stocks is a component of a larger group of similar investments. Compare the performance of your particular fund or stock to those of other funds or stocks that are active in the same market or sector. Although you'll need to be careful when comparing apples to apples, if you find any obvious variances or a trend of poor performance, it could be time to make some changes.‍

• Step 5: Make sure that your investments continue to be in line with your stated goals. Examine the performance of each investment and ensure its position in your overall plan. It is also very likely that our investments will need to be reviewed and possibly altered as our lifestyles change and evolve.‍

• Step 6: Regularly make the necessary adjustments and modifications to your portfolio. If required, take initiative and change your portfolio as needed. Make the necessary adjustments if your portfolio has deviated from the anticipated allocation or if your life plan has complicated your financial situation.

5 Tips to Follow After Your Portfolio Performance Evaluation

One option to manage your portfolio for better investment is with a cryptocurrency portfolio manager. We'll talk about five more 100 percent effective tactics right now.

Diversify Your Investments

Diversification is an essential successful portfolio management strategy. First, lay the groundwork for your portfolio. Discover which cryptocurrencies have a sizable market cap and a bright future. Second, set aside a portion of your portfolio for stablecoins that you can borrow at a higher rate. Third, consider small money invested in modest but expanding projects.

Average Cost in Dollars (DCA)

Dollar-cost averaging (DCA) is a system that automatically invests a predetermined dollar amount, regardless of a token's price. Timing-related anxiety can be decreased by making regular investments. If the price of the cryptocurrency climbs, you can buy more shares during a robust bull market. Your initial investment in fiat money will remain the same, allowing you to buy even more shares if the price of bitcoin declines.

Copy Trade Whales

Whales are investors that have enormous holdings and control the market for a certain cryptocurrency. By just imitating the successful investors' transactions, you might be able to sidestep the difficulties of finding out how the bitcoin market functions.

Copy trading can be successful, depending on who you are copy trading from. The crypto whale may, in rare instances, make a trade that is bad for your portfolio. But occasionally, you might strike it fortunate when a prominent participant in the bitcoin market makes a profitable trade.

Consider an exit strategy

Every successful trend eventually ends. Yes, strong ones can survive for a lot longer than people realize. However, eventually, the trend reaches a saturation point and reverses.

A wise trader will plan their escape before committing. You should think about the cost at which you can close the deal and make a profit.

Inhibit Your Emotions

The value of cryptocurrencies can swing dramatically in either direction. Due to their fear of missing out, traders commonly struggle with portfolio management (FOMO). People regularly buy something expensive out of emotion only to witness a huge correction kick in. Successful traders and investors usually have attainable objectives and plans. There will always be beneficial investment possibilities to raise your portfolio's overall value. Technical analysis helps you create more systematic trading techniques by taking emotions out of the equation. Nothing else needs to be done outside of implementing the plan.

Summary

We appreciate you reading all the way through our article. We made a sincere effort to cover all aspects of the crypto portfolio performance evaluation. It entails regularly reviewing your investment holdings. No matter if they are concerned with diversity, inflation hedging, return generation, personal values, etc., the objective is to make sure they are meeting your preferences and performance goals. We also provide instructions on how to do the assessment step-by-step. So let's say you finished the assessment. What's next? What ought you to do with the outcome? Don't worry! We won't leave you behind. We made an effort to explain a few performance-enhancing tips. We hope you made a better cryptocurrency investment now that you understand the evaluation. You can use the UnBlinked crypto tracker to keep track of all your holdings.