A reliable market indicator shows Bitcoin remains in high-risk territory, with historic data suggesting the cryptocurrency may be due for a sharp correction.
The sentiment in the crypto market has been bullish for consecutive days. As Bitcoin maintains stability above the $63K price level, market participants are pondering BTC’s next direction.
In a post on X today, prominent on-chain analyst Ali Martinez called attention to the recent observation that Bitcoin’s Sharpe Ratio remains in “high-risk” territory. He shared a chart highlighting the correlation between Bitcoin’s price and its Sharpe Ratio over the last ten years.
Notably, Bitcoin’s Sharpe Ratio measures risk-adjusted returns, assessing its performance relative to its volatility. Its entry into high-risk territory signals that the cryptocurrency may be at a local top.
Historical Observation of Bitcoin’s Sharpe Ratio with 87% Price Crash
Historically, when Bitcoin’s Sharpe Ratio enters the red high-risk zone, as it did in 2014, 2017, and late 2021, BTC has often been close to its peak. Following these high-risk zones, Bitcoin experienced sharp corrections, with prices pulling back significantly.
For instance, in December 2013, when Bitcoin set an all-time high above $1,150, the ratio hit the high-risk zone. A few months later, Bitcoin tanked to as low as $150, representing approximately an 87% price collapse.
However, after hitting $150 in early 2015, the ratio reached a low-risk point, from which Bitcoin later rallied to a fresh all-time high.
Specifically, by December 2017, Bitcoin hit a new peak of $20,089, and once again, the Sharpe Ratio entered the red zone. This was followed by another massive drop, with Bitcoin’s price falling 85% in December 2018 to below $3,200.
At that point, Bitcoin’s Sharpe Ratio also plunged to low-risk, providing a favorable buy signal for investors. As expected, the premier crypto advanced substantially afterward to a fresh peak of approximately $69,000 by November 2021.
Bitcoin’s price then crashed to $15,599 by November 2022, upon which the Sharpe Ratio triggered a low-risk signal.
Current Cycle: Bitcoin Still in the Red Zone
Now, in the ongoing bull cycle, Bitcoin’s Sharpe Ratio hit high risk back in March when Bitcoin set its all-time high at $73,750. CryptoQuant analyst Joao Wedson first called attention to this development on March 23, warning investors to “tread wisely.”
Indeed, since Bitcoin attained the $73K peak, the crypto market has not been bullish. Instead, there have been repeated downturns, with the most significant price drop occurring in August when Bitcoin fell to $49,121.
The leading asset has since rebounded by over 32% to $64,996. However, Bitcoin’s Sharpe Ratio has not issued a low-risk signal. This situation suggests that the crypto market may already be in a bear market without many realizing it.
Notably, some market analysts have warned that reliable cycle indicators have been flashing bear market signals since Bitcoin’s drop to $49K last month. However, the ongoing recovery beyond the $64K level bolsters market optimism.
Disclaimer: This content is informational and should not be considered financial advice. The views expressed in this article may include the author's personal opinions and do not reflect The Crypto Basic’s opinion. Readers are encouraged to do thorough research before making any investment decisions. The Crypto Basic is not responsible for any financial losses.
