What Are the Components of the Capital Asset Pricing Model (CAPM) and Why Is It Limited in Crypto?

CAPM calculates the expected return of an asset by adding a risk-free rate to the asset's beta multiplied by the market risk premium. The formula is: Expected Return = Risk-Free Rate + Beta (Market Return – Risk-Free Rate).

CAPM is limited in crypto because calculating a meaningful "beta" (a measure of volatility relative to the overall market) is difficult, as the "crypto market" is not a well-defined, singular benchmark. Furthermore, crypto's non-normal return distribution and high idiosyncratic risk are not fully captured by CAPM.