Professional investors don’t just look at the price of a currency relative to its long-term average to assess whether it is cheap. They use metrics such as the Sharpe ratio to determine position size.
Imagine two currencies: A and B. Coin A has fallen 30% from its recent high, but fairly steadily. Coin B is also down 30%, but its price is all over the place, going up and down by large percentages every day. If we look only at the drop from the top, 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 smoothest price path might give it a Sharpe ratio of, say, 1.5, while currency B’s wild swings leave it with a Sharpe ratio of just 0.5. So although both have the same 30% drawdown, Coin A clearly outperforms per unit of risk, making it the more attractive option for sizing a position.
Historical context
While a Sharpe ratio of -20 reflects a year of poor volatility-adjusted performance, it also lights up a rare sign of bottoming for the token’s price.
Historically, every time the annual risk-adjusted return has reached this level of “unattractiveness,” it has marked the point of maximum seller exhaustion.
