Community Submission - Author: Caner Taçoğlu
In finance, a beta coefficient is a tool used to measure the volatility of a certain asset in relation to the volatility of the overall market or a particular portfolio. In other terms, beta can be used to assess the risk of an investment in correlation to a benchmark, which can be represented by a broad market index or by a specific portfolio.
For instance, beta can be used to calculate an asset’s expected return on investment, according to its volatility in relation to the market. As such, beta is not used to measure the risk of investing in a particular asset alone. Instead, it measures the amount of risk that the investment would add to an existing portfolio.
If we consider all investable assets in existence, we would be comparing the whole market against itself, meaning that the value of beta would be precisely 1. But when comparing a certain financial instrument against the market, we will most likely get a beta higher or lower than 1. A beta higher than 1 indicates that the asset is not only volatile but also highly correlated with the market. In contrast, low or negative values of beta may suggest that an investment has lower volatility than the market, or that its price movements aren’t highly correlated with the market.
However, the beta coefficient may be deployed differently depending on the context. For example, mutual funds may calculate the beta coefficient of a financial instrument to gather insights into the risks of adding it to their investment portfolio. So beta calculations can help them choose which assets to include in their holdings, according to their risk profile.
If we apply the concept of the beta coefficient to cryptocurrency markets, Bitcoin could be used as the benchmark. So one could calculate the beta for BNB or other altcoins in relation to Bitcoin’s price and volatility. Alternatively, Bitcoin’s volatility could be measured against gold or stock markets. The resulting beta would give insights into the correlation between Bitcoin and traditional financial markets.