Risk Management for Crypto Assets: Towards Volume-Adjusted Metrics

Abstract

Cryptocurrencies (or coins) have attracted a significant interest from amateur and professional investors alike. Those currencies are traded on specialized exchanges and are characterized by extreme price dynamics and pockets of significant volatility with liquidity risk being a major concern. The article studies 20 cryptocurrencies over the period Q4.2013-Q2.2021 to glean key stylized facts about their dynamics. We demonstrate that traditional risk metrics may be insufficient to fully evaluate their risk profiles and so propose to leverage a set of novel volume-adjusted metrics. Adjustments to the Sharpe ratio, the Value at Risk (VaR) and the Expected Tail Loss (ETL) measures are outlined so they better reflect the specifics of cryptocurrencies. This enhances the classical two-dimensional mean-variance optimization with a third dimension – volume traded, thus engendering a new three-dimensional asset map that can be used for improved risk management. This new framework is illustrated over the 20 major cryptocurrencies and corresponding adjusted metrics are calculated and interpreted.