High risk but low return? The paradox of the crypto asset risk premium emerges

In recent years, the performance of risk assets has been remarkable, but a set of data is warning investors to exercise caution. Mike McGlone, senior commodity strategist at Bloomberg Intelligence, recently pointed out that after risk adjustment, crypto assets have actually underperformed traditional global equity markets. This phenomenon may indicate that the rapid upward cycle of this round of risk assets is approaching a critical point.

Warning signals behind the data

From the end of 2017 to December 30, the Bloomberg Galaxy Crypto Index (BGCI) achieved an approximate 90% cumulative increase. At first glance, this is an impressive result, but when this figure is compared to the total market capitalization growth of global stock markets, the situation becomes intriguing—both have roughly similar gains.

What is more noteworthy is the volatility indicator. The annual volatility of BGCI is about seven times higher than that of the global stock market, which means that investors, after taking on significantly higher risk exposure, are earning returns that are comparable to, or even suppressed by, traditional stock markets. This imbalance between risk and reward can have vastly different impacts at different stages of the market cycle.

The deeper implications of the disappearance of risk premium

From a market psychology perspective, this phenomenon reveals several key messages: First, the risk premium of crypto assets is gradually shrinking; second, in a high-volatility environment, it becomes significantly more difficult for market participants to obtain excess returns; finally, when risk-taking no longer yields commensurate rewards, investors’ risk appetite tends to contract.

These characteristics often appear at the tail end of a rapid rise in risk assets, signaling that the market may be shifting from a game of incremental growth to a game of stockpiling. For investors, this is a moment to reassess the risk-reward profile of their positions.