Crypto analyst Joao Wedson pointed to a notable risk indicator for the Bitcoin market.
According to Wedson, Bitcoin’s Sharpe ratio has turned negative, indicating a deterioration in the risk-return balance.
The Sharpe Ratio measures an asset’s risk-adjusted return based on its annualized return versus its annualized volatility rate. Wedson argued that a negative Sharpe Ratio indicates a challenging market environment for investors.
According to Wedson’s assessment, a Sharpe Ratio below zero means that despite high risk, the return remains low and capital is not effectively rewarded. Historical data shows that periods with a Sharpe Ratio above 1 represent “good” risk-return conditions, while periods above 2 represent “excellent” risk-return conditions. Conversely, a negative Sharpe Ratio is considered a “hostile” environment, especially for passive investment strategies.
The analyst noted that this doesn’t necessarily signify a market bottom, but it has frequently occurred in the past during periods of prolonged consolidation, cyclical transitions, and times when risk management takes precedence over optimism.
*This is not investment advice.