Professional investors don’t just look at a coin’s price relative to its long-term average to assess whether it is cheap. They use metrics such as the Sharpe ratio to determine position sizes.
Imagine two coins: A and B. Coin A has fallen 30% from its recent high, but fairly steadily. Coin B also fell 30%, but its price is all over the place, rising and falling by large percentages every day. Looking only at the decline from the top, both coins look equally “cheap”.
A professional investor would look beyond the price decline and consider the risk-adjusted return.
In this case, Coin A’s smoother price trajectory might give it a Sharpe ratio of, say, 1.5, while Coin B’s wild swings would leave it with a Sharpe ratio of just 0.5. So even though both have the same 30% drawdown, Coin A clearly outperforms 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 bottoming signal for the token’s price.
Historically, whenever the risk-adjusted annual return reached this level of “unattractiveness,” it marked the point of maximum seller exhaustion.
