Bitcoin Sharpe Ratio Turns Negative: Risk-Return Imbalance, Can It Restart a Positive Cycle in 2026

According to the latest news, Bitcoin’s Sharpe ratio has entered negative territory, reaching levels seen during the market crashes of 2018-2019 and 2022. In simple terms, this means that the price volatility risk borne by investors can no longer be compensated by current returns. This is a noteworthy signal, but what does it really imply, and how should it be interpreted?

Negative Sharpe Ratio: A Serious Mismatch Between Risk and Return

Indicator Meaning and Current Situation

The Sharpe ratio measures the excess return over the risk-free rate relative to volatility. When this ratio is negative, it indicates that holding Bitcoin no longer provides returns sufficient to compensate for its sharp price fluctuations.

Data shows that Bitcoin has fallen from its October 2025 all-time high of over $120,000 to around $90,000, a decline of nearly 25%. More notably, market volatility has not decreased during this process—in fact, it remains elevated. This is the direct reason for the Sharpe ratio turning negative: prices are falling, volatility is rising, yet returns are shrinking.

Currently, Bitcoin is priced at $89,046, with a nearly 7-day decline of 6.84%. This persistent downward pressure, combined with high volatility, makes risk-adjusted performance extremely poor.

How serious is this signal?

Historical comparisons suggest that the situation is indeed quite severe. The last time a similar negative value appeared was during the prolonged bear market of 2022. However, analysts emphasize that a negative Sharpe ratio is not an exact bottom indicator.

Historical data shows that once the Sharpe ratio enters negative territory, even if prices stop falling sharply, this condition can persist for months. This means the market may still need time to restore the imbalance between risk and return.

The Complex Face of the Current Market

Contradiction Between Bearish Signals and Structural Support

While a negative Sharpe ratio appears pessimistic, the market is not entirely bleak. According to recent information, the cost basis for short-term holders is close to $98,000, forming an important resistance level. Meanwhile, long-term holders continue to accumulate, providing structural support.

This reflects internal market divergence: short-term traders are under pressure, while long-term allocators are buying the dip. Such divergence may indicate a shift from a speculative-driven market to a more fundamental, allocation-driven one.

Geopolitical and Macro Factors Interference

The recent plunge was not solely driven by fundamentals. Escalating geopolitical tensions, declines in US stock futures, and worsening trade tensions have all exerted pressure on Bitcoin. These external shocks have further increased volatility and worsened the Sharpe ratio.

Key Observation Points: Can It Return to Positive?

Analysts point out that the market’s real focus is whether the Sharpe ratio can sustain a rebound into positive territory. This usually indicates two things:

• Returns are beginning to outpace volatility
• The market is entering a new upward cycle

When this indicator turns positive from negative, it often signals the start of a new bull market. However, such a transition has not yet occurred.

Outlook and Reflection

Based on the current market structure, Bitcoin may be facing a “recovery phase.” This period could last several weeks to months, during which the market needs to choose a path either through volatility easing or return improvement.

A positive sign is the Federal Reserve’s plan to inject $55 billion in liquidity. This could support the market, but whether it is enough to reverse the current risk-reward imbalance remains to be seen.

Additionally, the continued accumulation by long-term holders indicates that institutions and major players remain confident in Bitcoin’s long-term prospects. This structural support may limit the risk of a severe, disorderly correction.

Summary

Bitcoin’s entry into negative Sharpe ratio territory is a clear risk warning, indicating that the current high volatility and weak returns are out of balance. While similar to the 2022 situation, it is not an exact bottom signal but rather a sign that the market needs to rebalance.

Three key follow-up points are: first, whether this indicator can rebound into positive territory, often signaling a new bull market; second, whether the $98,000 cost basis for short-term holders can be effectively broken through; third, whether the ongoing accumulation by long-term holders can provide sufficient structural support.

Currently, the market is at a delicate equilibrium, with clear risk signals and structural support coexisting. Investors need patience, not panic.