Bitcoin Sharpe ratio falls to extremely negative level

Bitcoin’s Sharpe ratio has reached an extremely negative level, with the indicator dropping below -20 for the first time in a long time. Although the ratio has since recovered slightly, historical behaviour suggests that such periods often precede a new uptrend for the Bitcoin price. That is the conclusion analyst Darkfost draws from the latest on-chain data.

Bitcoin is available at OKX and Bybit.

What does the Sharpe ratio tell us about Bitcoin?

The Sharpe ratio is a well-known metric from traditional finance that indicates how much return an investor gets relative to the risk taken. A negative value means that the risk is high compared to the current return. In the case of Bitcoin, this picture currently fits well: the coin is closing its third consecutive quarter in the red, with a loss of 16.1% in the past quarter.

The current Bitcoin price stands at $62K, a decline of 0.5% in the past 24 hours. This fits into a broader picture of sustained pressure on the market, as was previously visible when active Bitcoin investors were on average at a 20% loss and the realised P/L ratio reached its lowest level in 43 months.

Historical pattern points to a possible bottom

Darkfost states that periods of extreme negativity in the Sharpe ratio, which can sometimes last weeks or even months, have almost always been accompanied in the past by the building of a new bottom. After those bottoms, a new upward move always followed. CryptoQuant’s chart shows that this pattern has been repeating since 2013, with similar dips around the bottoms of 2015, 2019, and 2022.

The analyst is clearly cautious: it concerns a long-term perspective and there are no guarantees. Nevertheless, he indicates that the data suggest that this is a time to build a position, precisely when market sentiment is at its lowest. Or as the well-known saying goes: buy when no one wants to. Anyone who still wants to buy Bitcoin would do well to take into account this broader picture and the associated risks.