Since reaching its current high of $126,000 in October of last year, the Bitcoin market has been selling off, which translates into increased bearish pressure. As a result, the flagship cryptocurrency has maintained a strong decline, dropping until it recently reached $60,000 – a deviation of more than 52% from its all-time high.
Bitcoin currently appears to be seeing a rebound, but the price action alone shows that it may also be one of its temporary recoveries. Interestingly, recent on-chain testing suggests that the current upward trend may be fueled by an important underlying metric.
What is the Bitcoin Sharpe Ratio
In a Quicktake post on CryptoQuant, Darkfost revealed that the Bitcoin Sharpe Ratio is now in a historically relative position at the end of bear markets.
The Sharpe Ratio is a risk-adjusted performance metric that measures how much the asset’s return (Bitcoin, in this case) makes up for the risk taken. High rate returns are strong relative to the risks taken; A decreasing ratio, on the other hand, indicates weak returns, while risk remains high. At the extreme end of the metric, a very low or negative Sharpe Ratio is a sign that market participants are taking too much risk with negative or negative returns. It is worth noting that very low Sharpe ratios are often seen during deep bear markets or even capitulation phases.
According to historical data, Darkfost explains that the Sharpe Ratio is currently at such a low level that it is reminiscent of the last stages of past bear markets. This means that the price of Bitcoin holds a higher performance risk, compared to the return, for current investors. Notably, the Sharpe ratio is not only at a low level, but continues in a continuous downward trend. This, according to market value, is a sign that Bitcoin’s performance will still be attractive to any willing investor.
However, it is precisely this volatility that sets the pace of Bitcoin price change. This is due to the fact that poor continuous returns often force hunting events, where weak hands are removed; this ends up setting the stage for a regrouping between strong hands.
There are two main approaches to consider in this situation: Analyst
Since the current market situation is still very uncertain, Darkfost offers two ways to engage the current situation. First, the analyst says that investors can begin to increase exposure gradually, and in line with the movement of the price towards low-risk areas.
Second, Darkfost explains that a market participant may decide to wait for a clear improvement in the Sharpe Ratio before entering the market at all. This will serve as an assurance strategy for the safety of investors.
However, Darkfost notes that the current bear phase may last several months before a real reversal is seen, regardless of the signal being illuminated by the Sharpe Ratio. As of this writing, Bitcoin represents a value of $69,064. CoinMarketCap data shows a loss of 1.71% over the past day.
