Professional investors don’t just look at a coin’s price relative to its long-term average to assess whether it’s cheap. They use metrics such as the Sharpe Ratio to determine position sizing.
Imagine two coins: A and B. Coin A has fallen 30% from its recent high, but in a fairly steady way. Coin B has also fallen 30%, but its price is all over the place, jumping up and down by big percentages every day. Looking only at the drop from the high, both coins look equally “cheap.”
A professional investor would look beyond the price drop and consider the risk-adjusted return.
In this case, A’s smoother price path might give it a Sharpe Ratio of, say, 1.5, while Coin B’s wild swings leave it with a Sharpe Ratio of just 0.5. So even though both have the same 30% drop, Coin A clearly outperforms per unit of risk, making it the more attractive choice for sizing a position.
Historical context
While a -20 Sharpe Ratio reflects a year of poor volatility-adjusted performance, it also lights up a rare bottoming signal for the token’s price.
Historically, every time the yearly risk-adjusted return has reached this level of “unattractiveness,” it has marked the point of maximum seller exhaustion.
