Tom Goldenberg is chief technology officer at Commandiv, a combined stock and crypto trading platform providing investors with automated trade recommendations and rebalancing tools.
The New York Times economist Paul Krugman keeps bashing bitcoin. Why would you trade such a volatile asset, he asks, if it lacks fundamentals?
“So, bitcoin just lost half its value. Where does it now stand relative to its fundamentals? Hard to say, because there aren’t any fundamentals. More than ever, this looks like a pure bubble.”
Let’s take a step back. How important are fundamentals to investing? When dealing with public stocks, we have access to a broad array of company data — revenue growth, price-to-earnings ratio, etc.
From my own observation, I’ve seen that while fundamentals can be useful, they usually aren’t enough to decide which stocks to trade.
A few months ago, I saw that a trader asked the quant community on the investment-algorithm platform Quantopian to build a successful trading strategy with only fundamental data. The results were disappointing.
The resultant strategy underperformed the S&P 500 by 155 percent, prompting feedback from a moderator:
“Purely fundamental-based strategies tend to have long predictive horizons on the factors. Their infrequent nature makes them hard to evaluate as you’d have to wait years to develop enough sample points.”
In other words, fundamentals are good, and there are surely some good strategies that use them. But many professional traders are looking beyond fundamentals to make trading decisions. So, the absence of traditional fundamentals from crypto shouldn’t by itself be a deal-breaker.
Another way of assessing an asset’s risk and potential reward is by looking at historical price data. We can do this with stocks as well as cryptocurrencies such as bitcoin and ethereum.
A key term when it comes to assessing price data is the Sharpe ratio. This is a score of the asset’s return on investment over its volatility. The goal is to maximize this value. A good Sharpe ratio should be above 1.0, usually.
Because all of the