For a conference, I need to show the Sharpe ratio's of Bitcoin portfolios using different trading strategies. To calculate the Sharpe ratio, I need Bitcoin's risk-free rate. The risk-free rate for normal stock markets is usually taken from Treasury documents. But cryptocurrencies have no central government and are not affiliated to any country. So how to determine the risk-free rate for, for example, Bitcoin? Is it simply 0?
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2 Answers
Bitcoin itself has no returns: 1 Bitcoin is worth 1 Bitcoin, always. Presumably you actually want to discuss the returns of a Bitcoin plus ordinary currency pair, such as BTC/USD. In that case you'd would treat it the same as you would treat any other asset trading against USD and use some presumed near zero risk bond rate, like US treasuries, in your analysis.
answered Sep 11, 2019 at 20:12
I think you should use Treasury bonds from your country to calculate the risk-free ratio.
Risk free rate is just a theoretical rate of return of an investment with "zero risk", which would be your local Treasury bonds.
If you are in US, you should use about 2% for 10 years, which is the approximately rate of return of US bonds.
Anything below this rate of return would not be acceptable for investors, theoretically, as you could invest in a "zero risk" treasury bonds and get 2%. I use quotes because there is no such thing as zero risk, even US bonds.
Bitcoin expected return is much more than 2% a year, so I believe you shouldn't be using this kind of metrics when thinking about investing in bitcoin.
