Sharpe Ratio Applications

The Sharpe Ratio is applied by calculating the difference between an asset's return and the risk-free rate, then dividing by the standard deviation of returns. In crypto, the risk-free rate is often assumed to be zero or the yield of a stablecoin staking protocol.

It provides a quick way to compare the efficiency of different trading strategies. A higher ratio indicates better risk-adjusted performance.

However, it assumes a normal distribution of returns, which is rarely the case in crypto. Therefore, it should be used alongside other metrics.

It remains a standard tool for evaluating professional portfolio managers.