Professional investors don’t just look at a coin’s price compared to its long-term average to assess whether a coin is cheap or not. They use metrics such as the Sharpe ratio to determine position sizing.
Imagine there are two coins, A and B. Coin A has fallen 30% from its recent high, but the decline has been fairly steady. Coin B has also fallen by 30%, but its price is going up and down a lot every day and is all over the place. Both coins look equally “cheap” if you only look at the decline from their highs.
Beyond price declines, professional investors will consider risk-adjusted returns.
In this case, A’s smoother price path could result in a Sharpe ratio of, say, 1.5, but coin B’s wild swings would leave the Sharpe ratio at only 0.5. Therefore, even though both have the same 30% decline, Coin A clearly performs better per unit of risk, making it a more attractive choice for position sizing.
historical background
While the Sharpe ratio of -20 reflects a year of poor volatility-adjusted performance, it also illuminates a rare bottoming signal for the token price.
Historically, whenever annual risk-adjusted returns reach this “unattractive” level, it has signaled the point of maximum exhaustion for sellers.
