Skilled buyers do not simply take a look at a coin’s value relative to its long-term common to evaluate whether or not it is low cost. They use metrics such because the Sharpe Ratio to find out place sizing.
Think about two cash: A and B. Coin A has fallen 30% from its current excessive, however in a reasonably regular means. Coin B has additionally fallen 30%, however its value is everywhere, leaping up and down by massive percentages day by day. Wanting solely on the drop from the excessive, each cash look equally “low cost.”
Knowledgeable investor would look past the worth drop and take into account the risk-adjusted return.
On this case, A’s smoother value path may give it a Sharpe Ratio of, say, 1.5, whereas Coin B’s wild swings depart it with a Sharpe Ratio of simply 0.5. So though each have the identical 30% drop, Coin A clearly outperforms per unit of threat, making it the extra engaging selection for sizing a place.
Historic context
Whereas a -20 Sharpe Ratio displays a yr of poor volatility-adjusted efficiency, it additionally lights up a uncommon bottoming sign for the token’s value.
Traditionally, each time the yearly risk-adjusted return has reached this degree of “unattractiveness,” it has marked the purpose of most vendor exhaustion.