Understanding the term
The Sharpe Ratio was created by William F. Sharpe in 1966 to gauge the two key elements of any financial investment, namely risk and return. Crypto is no exception, as it is one of the world’s largest, most active, and most volatile financial markets. When inexperienced investors start investing in emerging or long-running crypto assets, they use the Sharpe ratio to stay focused on both potential returns on investment and potential risks.
The formula for calculating the Sharpe ratio is:
To avoid unexpected losses in the crypto market, people use the Sharpe ratio because it can be calculated quickly and gives you a reliable measure of the risk-adjusted return.
The Sharpe ratio is an important metric used to assess the risk as well as the returns of any particular investment, such as crypto. If the Sharpe ratio is more than 1, then it means ROI is higher than the risk involved with an investment.