Professional investors don’t just look at a coin’s price relative to its long-term average to judge whether it’s cheap. They use metrics such as the Sharpe Ratio to determine position size.
Imagine two coins: A and B. Coin A is down 30% from its recent high, but in a fairly steady fashion. Coin B is also down 30%, but the price is all over the place, jumping up and down by large 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 can give it a Sharpe ratio of e.g. 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 drop of 30%, Coin A clearly performs better per unit of risk, making it the more attractive choice for sizing a position.
Historical context
While a Sharpe ratio of -20 reflects a year of poor volatility-adjusted performance, it also illuminates a rare bottom signal for the token’s price.
Historically, every time the annualized risk-adjusted return has reached this level of “unattractiveness,” it has marked the point of maximum seller exhaustion.
