Why Stocks Offer More Attractive Risk-Adjusted Returns Than Crypto For An Average Investor

Volatility Doesn’t Equal Value: Why Stocks Offer More Attractive Risk-Adjusted Returns Than Crypto For An Average Investor

Over the years, digital currencies, especially Bitcoin, have gained much attention due to their sensational growth and price fluctuations. The big banner of additional returns, however, requires that an average Indian investor weigh the success defined in terms of risk-adjusted return as opposed to sheer volatility. Compared to cryptocurrencies, traditional equities, specifically Indian stocks, mostly continue to fetch stable and better risk-adjusted returns.

Understanding Risk-Adjusted Returns

Risk-adjusted return measures return for the risk an investment has taken. The Sharpe Ratio is one such metric, which is often used to measure returns per unit of volatility. The higher the Sharpe Ratio, the better the risk-return performance; hence, it becomes an important tool for comparing different assets.

Indian Equities: Steady Growth with Manageable Risk

The Indian stock market has demonstrated consistent growth over the years:

• During the fiscal year 2023-24, the Nifty 50 Index was up by around 8.8% with a more or less steady performance amid global economic uncertainty.
• The five-year returns from the Nifty 50 are around 79%, which works out to an annualised return of around 13%. 
• The Sharpe Ratio for the Nifty 50 has been assumed to be about 0.74 in the last five years, thus suggesting a better risk-adjusted level of return.

Cryptocurrency: High Volatility and Uncertain Returns

With their fluctuations and past returns, cryptocurrencies are such fantastic volatiles:

• Over five years, the Sharpe Ratio with respect to Bitcoin is almost 0.97, indicating that returns and risk are quite proportionate.
• In February, there was a decline of about 17.2%. This was the worst performance of Bitcoin since June 2022, and it really emphasises how prone it is to steep falls.
• Although this staggering figure reached $94,963, Bitcoin's 30-day annualised volatility stood below 80% as compared to previous years. This should not be treated as a good index, however, as it indicates still very high fluctuations in prices.

Comparing Risk-Adjusted Returns

Profits are one side, but also risk considerations must enter into investment evaluations:

• Nifty 50: It presents an equilibrium between risk and return in the long run and moderate volatility and is therefore suitable for long-term investors who seek stable returns.
• Bitcoin: On the one hand, it can achieve highs and very high returns; on the other hand, because of the great volatility, it can face severe falls, which can deter the average investor.

The Case for Indian Stocks

Shares have several advantages for the common Indian investor:

• Regulatory Supervision: Indian stock markets function under the supervision of the Securities and Exchange Board of India (SEBI), ensuring transparency and investor protection.
• Income from Dividends: Quite a number of Indian companies do provide dividends, which adds to investors' income.
• Growth of Economy: Indian fast economic growth is beneficial to corporate earnings and the Indian stock market.

Conclusion

While the high returns offered by cryptocurrencies such as Bitcoin are enticing, the risks and extreme volatility make them less suitable for an average investor looking for stable long-term growth. Indian equities appear to be a far more balanced investment option owing to favourable risk-adjusted returns, regulatory safeguards, and alignment with the trajectory of economic growth in India.