Deep Analysis | How to Obtain Alpha in Crypto Market Investment

Source: Simplified Coin Market

In traditional financial markets, the safest investment is to buy government bonds (or deposits with banks). People often think of these as risk-free investments, and their returns are also risk-free returns. The investment behavior is actually to obtain a higher return than the risk-free rate of return. Therefore, in general, the rate of return that we consider is the part that exceeds the risk-free rate of return, which can be called additional income.

Everyone should know that risk and return are generally proportional, which means that the higher the risk, the greater the return. In the investment process, market participants generally buy more than one product, and the collection of these products can be called an "investment portfolio", and this behavior is what we often call asset allocation.

In order to measure the pros and cons of these portfolios in the market, two Greek letters have been introduced into modern financial theory, namely alpha (α, alpha) and beta (β, beta). The additional rate of return of each portfolio beyond the risk-free return is the sum of the two letters. The first part is irrelevant to the entire market, called α; the second part is obtained by multiplying the average return of the entire market by a coefficient, which is β, which is used to measure the systemic risk of this portfolio.

For all market participants, β is actually very easy to obtain, or it exists objectively. Therefore, there is a wide consensus in the market that β is “cheap” and α is “expensive”. Taking index funds in the traditional financial market as an example, these products are equivalent to purchasing pure β instruments. These products are equivalent to bearing the objective risk of the entire market, and there is no active adjustment. Therefore, these instruments are generally almost non-existent. Open up to the limit and only charge very low management fees. For the products managed by the top fund managers who have achieved brilliant results in the past, the fees charged are often much higher, but the share is still "difficult to get."

The academic community once refused to accept the existence of α, but in recent years, the trend of hedge funds has obviously completely reversed this view, because for hedge funds, their returns are basically decoupled from the overall market trend. This means that this type of fund has actually basically departed from β and entered the situation of pursuing pure α.

So how exactly is α obtained? Columbia Business School professor Michael J. Mauboussin gives a widely accepted argument in a paper. He believes that there are actually four basic sources of α:

Behavior : When an investor, or a small group of investors, operates in a manner that can cause price and value deviations, he will end up with an "invalid" result.

Information : When some market participants have different information from other market participants, and this information is indeed objective and effective, this part of the people can profit from this information asymmetry.

Analysis : When all participants have the same or very similar information, those who can perform more rigorous or better analysis can obtain corresponding advantages.

Technology : When some market participants are forced to buy or sell due to objective factors outside the market (laws, regulations or some policy adjustments), this may cause prices to run counter to value and form "opportunities". These four sources of alpha have actually been extensively verified in those efficient capital markets. But for the emerging cryptocurrency market, the existence of too many "unique factors" in this market makes us have to re-examine this answer.

First of all, the alpha sources in the four traditional financial markets mentioned above also exist objectively for the cryptocurrency market. After all, for the cryptocurrency market, although there are some specialities, it is also a market dominated by "capital" or "money". However, compared to other markets, there are actually two additional sources of alpha in the cryptocurrency market. One is the alpha produced by "new things," and the other is the alpha produced by "agreements." These two concepts are definitely exclusive to the cryptocurrency market.

The alpha generated by the so-called "new things" is actually not difficult to understand. For example, the popular concepts of ICO, IEO, etc. have created too many rich effects for this market. For traditional capital markets, a new IPO or new bond issue has made it difficult to set off such a big wave in the market. However, for the cryptocurrency market, due to the particularity of this market, the launch of new currencies, or the launch of some new derivatives, can become the focus of market speculation, including such as institutional investor admission The event may also cause the currency price to rise significantly. So for this circle that once belonged to geeks, in the process of catching up and even integrating into the traditional financial market, there will still be many "new things" born in the market. At present, these can still produce a considerable amount Alpha returns.

Secondly, because crypto assets are a digital asset issued on the blockchain network, and these assets are run on these distributed blockchain networks, the "rules" that these networks need to comply with are ours. Often said "agreement" will have a direct impact on the alpha of the relevant asset. One of the most intuitive examples is that the halving of the Bitcoin reward in the middle of next year is a “rule” formulated at the beginning of the Bitcoin network, and this adjustment will naturally produce relevant cryptocurrency prices. This kind of "kinetic energy", which directly affects and promotes the entire market, is actually the alpha generated by the agreement.

At present, the cryptocurrency market is very unique in many aspects, so naturally there will be some special ways to obtain α. With the development and maturity of the market, the cryptocurrency market will inevitably have many new changes in the near future, but one thing is certain that compared to the traditional financial market, the way of the cryptocurrency market itself to obtain α is inevitable Is richer, so if you want to get more α in your investment, this young market is a good choice.