If you are actively looking to upscale your investment, you need to know your investment portfolio and what it takes to succeed. Making informed decisions about your crypto investments can be aided by becoming knowledgeable about key metrics and how to evaluate them.
This guide will show you the most important metrics to consider when assessing your cryptocurrency portfolio, along with practical advice on applying them.
Key Metrics For Crypto Portfolio Analysis
As a crypto investor, you must consider the following key factors to measure a cryptocurrency portfolio correctly.
Portfolio Correlation
Portfolio correlation indicates how different investments in a group are linked by their gains or losses. This connection is measured using a number known as the correlation coefficient—this number ranges between -1 and +1.
A correlation coefficient of +1 indicates a perfect positive relationship; when one investment grows, the other grows by the same amount. Similarly, a correlation coefficient of -1 indicates an entirely negative relationship; when one investment increases, the other decreases in value.
On the other hand, a correlation coefficient of 0 indicates that there is no connection. The gains and losses of the two investments do not affect each other.
Bitcoin is popular among passive investors because it is a massive store of value. However, investors may add smaller cryptocurrencies to their investment portfolio if they are willing to take on more risk.
These smaller tokens have a higher profit potential, primarily when the crypto market performs well for riskier assets.
Maximum Drawdown
The Drawdown is a metric that shows how much an investment has dropped from its peak to its lowest. It assists crypto investors in determining how much they may lose. If the Drawdown is large, it indicates a greater chance of losing a lot of money.
The risk is reduced if it is small. To calculate the Drawdown, add the highest and lowest values of the investment and divide the result by the highest value. This yields a percentage indicating how much the investment fell.
Sharpe Ratio
The Sharpe Ratio, developed by Nobel laureate William F. Sharpe, is an essential tool for investors to determine how well their investment portfolio is performing compared to the risks they are taking. It’s a popular metric in portfolio analysis.
The best way to determine this ratio is to subtract the risk-free return percentage from the expected return on investment. Then, divide the result by the standard deviation of the investment’s returns.
A higher Sharpe Ratio illustrates that your investments are producing more increased returns for the level of risk they carry. It shows that your investment strategy is well-balanced and optimized.
It allows you to determine whether you are getting good returns without taking too much risk. It is an excellent way to gauge the performance of your investments and the risks involved.
Return On Investment (ROI)
The ROI compares how much money you put in at the start to how much it’s worth now to show how well your portfolio is doing. A high ROI indicates that your investments are performing well, whereas a low ROI means you’re earning less than anticipated.
If you have a multitude of cryptocurrencies in your portfolio, you can use ROI to analyze how each one is performing. It allows you to determine whether it is an excellent time to buy more, sell some, or hold on.
Portfolio Volatility
Portfolio volatility is the amount by which the value of your investments fluctuates. Changes in the cryptocurrency market, the performance of all the coins in your portfolio, and significant global events can impact this factor.
If your portfolio has high volatility, prices can fluctuate dramatically, resulting in large gains or losses. Knowing your portfolio’s volatility allows you to manage the risks and potential rewards of your investments better.
You may take more or less risk depending on your age, the time you intend to invest, and your goals. A safe option is to diversify your investments across digital assets in your crypto portfolio.
Steps To Analyze Your Crypto Portfolio
Select A Portfolio Tracker
Explore various tools for keeping track of your cryptocurrencies until you find one that meets your requirements. However, a portfolio tracker like the CoinStats Crypto Portfolio Tracker is an excellent option.
It lets you keep tabs on your crypto portfolio and the overall crypto market. CoinStats is well-known for its ease of use and speed in tracking, swapping, buying, sending, receiving, and earning cryptocurrencies.
Apply Metric And Evaluation Tools
Adopt different assessment tools to get the best trading results. Such metrics and tools include:
- The coin’s market dominance
- Historical price data
- Technical analysis tools
- Fundamental analysis tools
After carefully analyzing your portfolio, it’s time to make informed investment decisions. This could include rebalancing your portfolio, fine-tuning your investment strategy, or establishing new goals.
Final Thoughts
When you base your decisions on thorough analysis, you increase your chances of achieving your crypto investment goals. Remember that the cryptocurrency industry is constantly evolving. Therefore, it is critical to stay current with the latest tools and analysis methods.
