Alpha income and beta income are two concepts that we often hear in the investment process, and are widely used to evaluate the performance of stocks, funds or investment portfolios. Alpha is used to measure an investment's return compared to a market index, and beta is used to measure the volatility of an investment, indicating its relative risk.

These two names originally come from a paper "Portfolio Theory and Capital Markets" published by Nobel Prize winner William Sharp in 1964, which pointed out that investors face systematic and unsystematic risks when trading in the market. where systematic risk can be derived from the security market line in the Capital Asset Pricing Model (CAPM):

E（Ri）＝Rf＋βi［E（Rm）−Rf］

is defined, and β is an index that measures the level of systematic risk a security or efficient portfolio undertakes. Therefore, he split the income of financial assets into two parts: the part that fluctuates with the market is called beta income, and the part that does not fluctuate with the market is called alpha income. Corresponding to the formula is:

Asset Return = Alpha Return + Beta Return + Residual Return

secondary title

Understanding Alpha and Beta

First of all, we need to define a market benchmark. Each financial asset corresponding to this market benchmark will have a beta coefficient to indicate the degree of volatility of this financial asset compared to the market benchmark. For example, if the beta coefficient is 1, it means that the fluctuation of the financial asset is consistent with the market benchmark. If the market benchmark rises by 10%, the financial asset will also rise by 10%. Correspondingly, the income generated by the underlying fluctuation with the performance benchmark is called Beta earnings. For example, as the performance benchmark rises by 10%, the target rises by 11%, and this 11% is the beta return. Beta income can be regarded as a relatively passive investment income, that is, the income brought about by bearing market risk (the performance benchmark falls by 10% and the target falls by 11%) (the performance benchmark rises by 10% and the target rises by 11%). This kind of income generally does not need to be actively obtained through stock selection, timing, etc., but is obtained with the ups and downs of performance benchmarks (such as the broader market). Most of the passive index funds we hear about are this type of fund.

So what is alpha gain? According to the above formula we know:

Alpha Return = Asset Return - Beta Return

What does this mean? Let's give you an example. For example, if a fund’s tracked performance benchmark rises by 10%, and its beta is 1.1, its beta return is 11%. However, the fund has achieved a return rate of 20% through some strategies, and the extra 9% excess return is the alpha return. . What we need to pay attention to is that this part of the alpha income has nothing to do with market fluctuations (the fund income generated by the performance benchmark rise is the beta income). This part of the income needs to be obtained by the fund manager through management, timing, and stock selection. Alpha returns are what the vast majority of actively managed funds in the market pursue.

For better comparison and explanation, let's make a metaphor. For example, our speed when taking a train is actually equal to the speed of the train plus our own speed relative to the train. The train itself is going fast, and we will naturally be fast on the train. When the train slows down, our speed will also slow down. This is the beta income. But while the train is moving forward, we can also run forward in the train, which will also increase our own speed, which is the alpha benefit.

secondary title

Alpha and Beta in Cryptocurrencies

The traditional financial field has been developed for almost a hundred years, and the alpha and beta returns have been relatively well studied. As an emerging asset that has just been developed for ten years, cryptocurrency still has many immaturities. If the stock market index (such as the Shanghai Composite Index) can be used as a measure of beta returns, then only BTC can act as a similar index in the cryptocurrency field. The reasons are:

• The ratio of BTC to the total market value of cryptocurrencies is too large, even reaching more than 70% in the bear market;

• The correlation between the price of other cryptocurrencies with large market capitalization and BTC is too high;

• Although some institutions have launched some index products spontaneously, they are not widely recognized by the market;

• A large number of investors use BTC as the pricing standard.

This has caused the volatility of BTC itself to become the de facto market benchmark, so you only need to hold BTC to obtain beta returns. If you seek alpha, you need to earn more than holding BTC in a bull market.

Alpha income comes from the alpha strategy, the traditional fundamental analysis strategy, which focuses on currency selection and relies on selected sectors and investment portfolios to surpass the market. This method requires investors to have high research and analysis capabilities, and is generally used in foreign markets. among hedge funds. In terms of specific strategies, it mainly covers:

1. The long/short strategy is to buy some assets into coins and sell some assets short. Hedge fund managers can freely adjust the market risks faced by the fund by adjusting the ratio of long-short assets, often avoiding market risks that they cannot grasp, reducing risks as much as possible, and obtaining relatively stable returns.

2. The arbitrage strategy is to simultaneously buy and sell two types of related assets in a reverse transaction to obtain the price difference. Some risk factors are hedged during the transaction, and the remaining risk factors are the source of excess returns of the fund.

3. The event-driven strategy is to invest in projects that are about to have special and major events, such as companies that undergo spin-offs, acquisitions, mergers, mainnet launches, version updates, hacker attacks, or token repurchases.

summary

summary

In terms of capital volume, the total market value of the entire cryptocurrency market is currently nearly 2 trillion U.S. dollars, which is still very small compared to traditional financial markets. On the other hand, the currency circle has its own unique characteristics: first, it is greatly affected by policies, and second, the market is flooded with a large number of irrational retail investors. These two characteristics make it much easier to find alpha returns in the cryptocurrency market , Therefore, there is a myth of hundreds of times in each round of bull market.