How does convexity affect the risk profile of digital assets?

1 answers

• Emily BoothJul 21, 2023 · 2 years ago
  Convexity is a term that often comes up when discussing the risk profile of digital assets. In simple terms, convexity refers to the curvature of the price-yield relationship. When it comes to digital assets, convexity can have a significant impact on their risk and return characteristics. Positive convexity implies that as the price of a digital asset increases, the rate of increase also increases. This can result in higher potential returns but also higher volatility and risk. On the other hand, negative convexity means that as the price of a digital asset decreases, the rate of decrease also increases. This can act as a hedge against market downturns but may limit the potential for gains. It's important for investors to understand the convexity of digital assets and consider it when making investment decisions to effectively manage their risk exposure.
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