Market analyst Michaël van de Poppe has highlighted a key on-chain development that suggests a potential market rebound. This observation comes as Bitcoin remains below $70,000, having lost 2.38% over the past week.
Bitcoin’s Short-Term Sharpe Ratio Suggests Bear Market May Be Ending
In a post on X on February 21, van de Poppe shared a bullish outlook for Bitcoin, pointing to historical data of the Bitcoin Sharpe Ratio. This on-chain metric measures the excess return Bitcoin generates relative to its volatility.
The Sharpe Ratio is cyclical, typically showing high positive values during bull markets and turning negative during prolonged downturns. According to the data van de Poppe shared, the short-term Bitcoin Sharpe Ratio has fallen to -38.38, a level historically seen as a low-risk accumulation zone.
Van de Poppe notes that the ratio has reached similar lows three times before: in early 2015, early 2019, and late 2022. Each instance was followed by a significant price rally. A drop to such extreme lows on the short-term chart indicates Bitcoin is underperforming in terms of risk-adjusted returns, which can present an ideal entry point for investors.
Over the last five months, Bitcoin has been in a steep bear market, declining 45.86% from its all-time high in October. In February alone, BTC prices have fallen over 23%, briefly dipping to around $60,000 at the start of the month.
Van de Poppe’s analysis also indicates this recent downturn has negatively impacted the BTC-to-Gold ratio, creating a potential market opportunity due to the imbalance between the two assets. Based on historical reactions to similar conditions, he describes this signal from the Sharpe Ratio as “super bullish.”
Bitcoin Market Overview
As of now, Bitcoin is trading at $68,299, up 0.72% over the past 24 hours. However, its daily trading volume has dropped 50.04% to $19.15 billion.
Notably, market analyst KillaXBT anticipates Bitcoin could retrace to around $67,800 on Monday to fill the CME gap created over the weekend. Bitcoin has a strong track record in this regard, with 96% of CME gaps observed since 2022 being filled within two weeks.
Frequently Asked Questions
FAQs Bitcoins Negative Sharpe Ratio The Bullish Argument
BeginnerLevel Questions
1 What is a Sharpe Ratio
The Sharpe Ratio is a common financial metric that measures an investments return compared to its risk A higher positive number is generally better indicating more return for the risk taken A negative number means the investments returns have been negative over the measured period
2 What does a Sharpe Ratio of 38 mean for Bitcoin
It means that recently Bitcoins price performance has been very poor relative to its typical ups and downs The 38 is an extremely low value highlighting a period of significant negative returns with high risk
3 Why would a terriblesounding metric like 38 be considered bullish
Some analysts view extreme negative readings as a sign of capitulation or maximum pessimism in the market The logic is that when fear and selling are this extreme the asset may be oversold and primed for a potential rebound as there are fewer sellers left
4 Isnt a negative return always bad How can it be good
In the short term yes negative returns are bad for holders The bullish argument isnt that the negative return itself is good but that the severity of the negative sentiment it reflects could signal a turning point Its a contrarian blood in the streets indicator
5 Should I buy Bitcoin just because this ratio is so low
No This is a single data point and a highly speculative signal It should never be the sole reason for an investment decision Always do your own research understand Bitcoins high volatility and only invest what you can afford to lose
AdvancedLevel Questions
6 How is the Sharpe Ratio calculated and what timeframe is this 38 based on
The Sharpe Ratio is Standard Deviation of Portfolio Return The 38 figure is based on a specific likely shortterm rolling window during a sharp downturn The exact timeframe is critical context the analyst would have used
7 What are the main criticisms of using the Sharpe Ratio for Bitcoin
Bitcoins returns arent normally distributedthey have extreme fat tail events