Bitcoin Sharpe ratio slides to levels seen in previous market bottoms

The Bitcoin Sharpe Ratio (SR), a crucial metric for evaluating risk-adjusted returns, has recently dropped to multi-year lows, triggering comparisons to valuation floors observed during previous major bear market cycles. The Sharpe Ratio measures the excess return of an investment relative to its volatility (standard deviation). A lower ratio indicates that investors are taking on significant volatility without commensurate return compensation.

Current 90-day annualized Sharpe Ratio readings are mirroring the depressed levels recorded during the capitulation phases of the 2018 crypto winter and the low point of the 2022 deleveraging event. Historically, such severe compression in the SR signals peak market pessimism and the flushing out of speculative short-term risk.

The decline is driven primarily by sustained realized volatility coupled with stagnant price action or negative returns over the measurement period. As institutional capital flight and retail fear push prices sideways while uncertainty remains high, the risk component of the calculation increases sharply relative to performance.

From a contrarian perspective, the low Sharpe Ratio has traditionally functioned as a strong indicator of a potential market bottom. When the risk-reward profile is worst—as demonstrated by a highly penalized SR—it suggests that the asset is severely undervalued relative to its long-term potential. While the immediate outlook dictates high risk for low reward, the historical pattern suggests that these levels precede strong cyclical recoveries, offering a key signal for long-term investors focused on accumulation phases.

Source: Bitcoin Sharpe ratio slides to levels seen in previous market bottoms