Bitcoin’s Sharpe ratio is nearly at zero, a rare risk-reward signal

A Bitcoin technical indicator known as the Sharpe ratio, has dropped to nearly zero, reaching levels usually seen near major market bottoms.

The Bitcoin Sharpe ratio is at “a level historically associated with moments of maximum uncertainty and the early stages of risk repricing,” said CryptoQuant analyst I. Moreno on Monday.

The analyst observed that Bitcoin is now entering the same zone seen in 2019, 2020 and 2022, when the ratio spent time at “structurally depressed levels” before new multimonth trends emerged.

“This does not guarantee a bottom, but it does indicate that the quality of future returns is starting to improve, provided the market stabilizes, and volatility begins to normalize.”

The Sharpe ratio measures return versus risk. When it is near zero, it means Bitcoin (BTC) has delivered poor returns relative to its volatility, creating a better investment setup.

Bitcoin Sharpe ratio could signal smart money

Historically, periods of low Sharpe ratio have often preceded new long-term uptrends when smart money enters, as the risk-reward balance improves. It is the opposite of buying during euphoric peaks when the Sharpe ratio is high.

The ratio surged toward 50 in early 2024 when markets were pumping, and Bitcoin topped $73,000 for the first time.

However, the analyst cautioned that trend recovery has yet to materialize.

“Bitcoin is not yet signaling trend recovery, but it is signaling that the risk-adjusted landscape is becoming more attractive for forward returns.”

Bitcoin’s Sharpe ratio has fallen to zero. Source: CryptoQuant

Unusually large Bitcoin transfers mark historic week onchain

More than 8% of all Bitcoin was moved over the past week, according to onchain data from Glassnode.

This has only occurred twice in the past seven years, both during bear markets in December 2018 and March 2020.

“This makes the latest drawdown one of the most significant onchain events in Bitcoin’s history,” commented Joe Burnett, director of Bitcoin Strategy at Semler Scientific.

In just 10 days, BTC dumped a whopping 23%, or over $24,000, bottoming out at around $82,000 on Friday. It has since recovered slightly, tapping $89,000 in late trading on Monday.