Why Bitcoin's reward-risk match has been lost: Market red flags shown by the Sharpe ratio

Currently, the Bitcoin (BTC) investment landscape is undergoing a significant turning point. The numbers shown by key Wall Street indicators indicate that the risk-reward matching of Bitcoin holdings is broken. The Sharpe ratio, an important metric, is sending signals that long-term investors should pay close attention to now.

Disproportionate risk-reward from high volatility

According to CryptoQuant data, Bitcoin’s Sharpe ratio has entered significant negative territory, comparable to the levels seen during the sharp decline in 2018~2019 and the market crash in 2022. This indicator shows the reality that risk-adjusted performance is extremely poor.

The Sharpe ratio is an important metric used by fund managers and investors to measure whether the portion of the return that exceeds the U.S. Treasury bills (safe-haven assets) is adequately compensating for the volatility risk associated with holdings. What the negative numbers mean is that the rewards are not commensurate with the intense price movements.

Currently, BTC is trading around $84,300, in a bad environment where high volatility and weak returns occur at the same time. This reflects a situation where sharp fluctuations and uneven rebounds during the day do not yield profits.

Historical patterns tell the difficulty of bottoming out

Interestingly, similar negative Sharpe ratio phases have occurred multiple times in the past. In late 2018 and early 2019, the indicator remained in negative territory for several months, while market prices remained weak. The same pattern was seen in 2022, with indicators remaining subdued amid a prolonged bear market brought on by leverage failures and forced selling.

The key lesson is that the negative Sharpe ratio condition can persist for an extended period after the price plunge stops. In the past, BTC has undergone significant trend reversals not when the Sharpe ratio fell below zero for the first time, but during a sustained recovery into positive territory above zero.

Bottoms are impossible, but risk-reward turning points can be measured

An analyst at CryptoQuant made an interesting comment: "While the Sharpe ratio does not accurately predict bottoms, it does indicate that the risk-reward balance has been reset to levels that have historically led major movements.

That is, this indicator does not give a guarantee that “the price will not fall further”. However, it provides important information in the sense that the risk-adjusted environment is matched to historical tipping points.

Bitcoin Status: A Market Surrounded by Much Uncertainty

As of the end of January 2026, the situation for Bitcoin has become more complicated. At press time, BTC fell to $85,200, setting a new low in 2026. It has since corrected further to around $84,300, with a 24-hour decline of -5.83%.

This decline accelerated in the US morning trading session and spilled over into other assets. Gold prices plummeted from over $5,600 to $5,200 on Thursday, and the NASDAQ also recorded a 1.5% decline, contributing to Microsoft’s decline of more than 11% after its fourth-quarter earnings.

In the midst of these compound market pressures, how the balance of risk and reward of Bitcoin holdings evolves may signal the resumption of the bull market in the next cycle. While the current extremely low Sharpe ratio does not directly guarantee future performance, it is necessary to carefully monitor future market trends from a risk management perspective.