The Sharpe Ratio: My Secret Weapon in the Chaotic Crypto World!

Look, investing is a damn minefield, and I know it from personal experience. When I started in crypto, I got carried away by the hype and ended up burning myself several times. The problem? I had no idea how to measure the balance between the risk I was taking and what I was earning. That's where the Sharpe Ratio comes in, a tool I discovered too late but now I never let go of.

This indicator was invented by William Sharpe ( a guy who won a Nobel, no less ) and I swear it changed my way of investing. It's not just another number: it's the difference between betting like a lunatic or investing wisely.

What the hell is this ratio?

In short, the Sharpe Ratio measures how much money you make for each unit of risk you take on. The most interesting part: it separates whether you are winning because you are smart or simply because you are playing Russian roulette with your money.

When I see a Sharpe Ratio above 1, I know I'm on the right track. If it reaches 2, I get excited. And if it exceeds 3... oh my! That means I'm making a fortune without risking like a madman.

On the contrary, a ratio below 1 means that I am taking on too much risk for the little I earn. Come on, they are pulling my leg.

An example that even my grandmother would understand

Imagine two investments:

• The "A" promises me a 10% return with a 5% risk
• The "B" offers me a 15% but with double the risk (10%)

With a risk-free rate of 3%, investment "A" has a better Sharpe Ratio. Surprising? Well, yes. "B" seems more attractive with that 15%, but I am exposing my money to much more volatility.

Why does it matter so much to me?

When I started using this ratio, I stopped falling for the typical traps of the crypto market. I could compare Bitcoin with any shitcoin that promised the moon and clearly see which one gave me a better value for money in terms of risk.

Moreover, in markets as volatile as ours, this metric is pure gold. Do you remember when BTC dropped 50% in a matter of days? Those who invested only looking at the potential for profit jumped out of the window, while those who analyzed the Sharpe Ratio knew exactly what they were risking.

The traps that no one tells you about

This ratio is not perfect, damn it! It treats all volatility as something bad, even when the price goes up. It is also based on historical data, as if the past could perfectly predict the future ( HA! ).

And the worst part: it assumes that returns follow a normal distribution, when anyone who has been in crypto for more than a month knows that this market is anything but normal.

Bitcoin vs Ethereum: The final battle

Let's see a real case that happened to me:

• Bitcoin: 20% expected return with 30% volatility
• Ethereum: 30% return but with 50% volatility

Calculating the Sharpe Ratio ( with 2% risk-free rate ), Bitcoin performed slightly better, despite offering lower returns.

Does this mean you should always choose Bitcoin? Not necessarily. If you have the stomach for the roller coaster, ETH could bring you more joy. But at least with the ratio, I knew exactly what I was betting on.

The Sharpe Ratio has saved me from numerous losses and helped me maintain my sanity in this wild market. It is not infallible, but it is a thousand times better than investing blindly or following influencers who have no idea.

What do you prefer? To earn a little securely or to risk it all for the chance to get rich?

$BTC $ETH $SOL

Notice: this reflects my personal experiences, it is not financial advice. I could be completely wrong. Do your own research.