Sharpe Ratio: why crypto traders should know about it

When you look at two cryptocurrencies with different yields, how do you determine which one is actually better? Just choose the one with the higher percentage of profit? Not quite. This is where the Sharpe ratio comes into play — a tool that shows not just the return, but the return per unit of risk.

What is this anyway?

Imagine this: there are two portfolios. One rose by 10% with fluctuations of 5%, the other by 15% with fluctuations of 10%. At first glance, the second one seems better, but if the first one gave you a 10% return with less volatility — it might be more profitable. This is exactly what the Sharpe ratio measures: how much profit you get for each percent of risk.

How to interpret the numbers?

• Above 1 — acceptable. The investment compensates for the risk normally.
• Above 2 — good. This is already attractive.
• Above 3 — excellent. Rarity on the market
• Below 1 — so-so. The risk may outweigh the income.

Real Example with BTC and ETH

Bitcoin showed a +20% return over the period with a volatility of 30%. Ethereum — +30%, but with a volatility of 50%. For a risk-free rate of 2%:

BTC: (20-2) / 30 = 0.6 ETH: (30-2) / 50 = 0.56

It turns out that BTC is technically more efficient in terms of risk, even though it has risen more slowly. If you are not ready to catch the bottom at a 50% drop, Bitcoin is a better choice for you.

Where is it applied?

1. Portfolio comparison — quickly understand which investment fund is really well managed, and which is just lucky.
2. Risk Management — determine whether you are truly earning smartly or just getting lucky.
3. Volatile market — in a bear market it helps to separate the lucky ones from the pros.

Limitations to Keep in Mind

Sharp is not without sin. He considers all volatility as risk, even price rise. In the crypto market with its extreme volatility and skewed distributions, there is rarely symmetry; this indicator can give a distorted picture. Plus, he is focused on the past — historical data does not guarantee the future.

Withdrawal

The Sharpe ratio is not a magic wand, but a useful tool for assessing what gives you more: real skill or luck. In crypto investing, where emotions run high, such a sober metric can be a lifesaver. Use it alongside other indicators — and your strategy will be noticeably more professional.