I just came across this article on Coin Telegraph regarding the Sharpe ratio. A lot of folks have been concerned about BTC's Sharpe and Sartori ratios lately.
To sum it up, the Sharpe ratio basically compares an investment's performance to a risk-free asset while factoring in its risks, according to Wikipedia.
This ratio seems to be hitting some lows, which indicates there's more risk involved. It's not quite at the levels we saw during the last three big bear markets, but it has dropped more than it did during the Covid crash.
Honestly, I'm a bit confused about how to interpret the chart from the article. The authors claim that since 2023, the ratio has been on a "low risk" path. Yet in past bear markets, when the ratio was falling and hit the bottom, those times were labeled as "high risk" based on how they charted it.
From what I see in the chart, we've been stuck in a prolonged decline of the Sharpe ratio since early 2024, right after the last ATH before the halving, which was when the Sharpe ratio peaked. So, it seems to me this downward trend should be classified as "high risk". You could even say it's lasted way longer than the previous two "high risk" periods shown in the chart.
"The way I see it when looking at this chart, we have been going through such a drawn out decline of the Sharpe ratio since around early 2024, when the previous ATH was breached before the halving, which is when the Sharpe ratio peaked. Therefore, this declining phase in the chart should be labelled "high risk". It could be argued that it has been substantially longer than the previous two "high risk" episodes on this chart. In fact, unlike during the previous two bull runs, the majority of our latest bull market appears to have occurred amidst "high risk" conditions, as far as the Sharpe ratio is concerned."
So that is not what the sharp ratio is. Sharp ratio measures volatility. Growth (positive volatility) and decline (negative volatility) are the same.
Why does the graph on the CoinTelegraph post have the sharp ratio at -10? Because it would be under performing t-bills (the risk free rate) given its volatility by a factor of 10.
There is no relationship between Sharp Ratio and if Bitcoin will increase in price. That article was total BS in finance terms and was just there to sell Bitcoin.
OK, I see, thanks for the background info on the definition and meaning of this indicator. But I would have said this does not alter the observation that this particular ratio has been in decline since early 2024, during what was supposed to be a bull market, whilst during previous bull markets, as per this chart, it appears to have risen in parallel with the price. Or am I missing or confusing something here?
My hope is that once the ratio has bottomed - and we appear to be fairly close to that point, given that the decline has lasted almost a year already - we will see a return of "proper" bull market conditions.
At a superficial glancde, IMHO this ratio seems to be correlated with the monthly RSI. There, too, the jury is still out on whether this longer term measure has established a bottom or will drop a bit further.
Next time, when you want to reply to a particular part of a post, no need to copy the whole thing he said and put it in quotation marks; you can simply delete the other part of the post and reply to only the part you want like I did here.
The article is not total BS, and he is not selling Bitcoin.
He clearly states that the risk of investing in Bitcoin now is very high. It's only using the past records to analyse that when the ratio gets this low, it signifies that it starts improving. As stated in the article, the correction might take months. The fact that it says it might be the end of the price fall doesn't mean it will automatically be less risky immediately.
This doesn't sound like someone who just wants to sell Bitcoin, does it?
Situations like this are nothing new, being early almost alwayys comes with an element of gambling and luck at the beginning, before clarity and conviction arrive later.
Amazon during the dot-com bubble (2000–2002)
Amazon’s stock collapsed over 90% and was widely seen as too risky, yet its core business kept growing and eventually dominated e-commerce.
https://www.cnbc.com/2018/12/18/dotcom-bubble-amazon-stock-lost-more-than-90percent-long-term-investors-still-got-rich.html
Tesla in 2018–2019
Tesla faced extreme volatility, bankruptcy fears, and poor risk metrics, before sentiment flipped and long-term believers were proven right.
https://www.cnbc.com/2020/11/03/musk-tesla-was-about-a-month-from-bankruptcy-during-model-3-ramp.html
The internet after the dot-com crash
After the bubble burst, the internet was labeled speculative and overhyped, yet it went on to become the backbone of the global digital economy.
https://www.csmonitor.com/2001/1227/p13s1-stin.html
It's very true if you say the bubble crash for altcoins which are abundant and have been created intensively more than needed while altcoin projects are mostly useless and scam too.
It's not true if you implied that Bitcoin has been witnessing a bubble crash.
Bitcoin has a very good future with solid growth so far, and it won't have any bubble crash like Tulip mania, Internet dot-com etc. The whole blockchain and cryptocurrency are based on Bitcoin as its industry spine.
Lindy effects already shown on Bitcoin while with altcoins, they even quickly died before any Lindy effects appear.
The bullish case for Bitcoin.
Tulip mania.
Lindy effect.
Exactly.
It just means that we will stop seeing "memecoin volatility" (borrowing the term from another user) on Bitcoin for the immediate future.
OP's linked article was talking about price volatility, which is what Sharpe Ratio means, not price decline. It's easy to confuse the two if you're not into trading.