Measuring Bitcoin's Risk And Reward

Summary In this article, I review and explore techniques to gauge bitcoin’s risk relative to its reward and to assess its portfolio viability relative to other asset ￰0￱ believe that the Sharpe Ratio’s use of total realized volatility may have overestimated bitcoin’s true ￰1￱ of September 15, bitcoin’s Omega Ratio over the previous year was 1.29, upside returns outpacing downside returns by 29%. By David Puell Introduction This article is written not only for investors with an intermediate-to-advanced degree of knowledge about financial metrics, but also for bitcoin skeptics whose concerns persist even as the asset is maturing in institutional ￰2￱ its 16-year history, conservative investors have observed that: “Bitcoin is too volatile,” or, more specifically, “Bitcoin’s returns are not worth the anxiety associated with its volatility.” In our view, such observations miss the nuances of bitcoin’s price history: they fail to separate its upside reward from its downside ￰3￱ a result, we believe many, if not most, investors have underallocated to bitcoin in multi-asset ￰4￱ this article, I review and explore techniques to gauge bitcoin’s risk relative to its reward and to assess its portfolio viability relative to other asset ￰5￱ Sharpe Ratio A widely regarded financial metric, the Sharpe Ratio assesses the potential risk relative to reward of an asset, helping analysts and investors with financial modeling and portfolio ￰6￱ to measure the unit of reward per unit of risk, the Sharpe Ratio is constructed as follows: Interestingly, the Sharpe Ratio equates risk to an asset’s total realized volatility over ￰7￱ somewhat controversial, that notion is widely applied in financial analysis. 1 How does the Sharpe Ratio measure bitcoin’s risk relative to its reward?

The chart below captures bitcoin’s mean returns and realized volatility—the numerator and denominator of the Sharpe Ratio, respectively—on a yearly basis over the past 14 years. 2 As of September 15, 2025, bitcoin’s yearly returns and volatility have averaged 76.4% and 44.1%, ￰8￱ other words, the rewards have been “worth” the risk.) tends to be roughly one and a half times the volatility hurdle of the Sortino Ratio (47%). This implies a “premium” penalty of 70.5%—or 32.7 percentage points (pp)—presented by the Sharpe Ratio over the Sortino Ratio. Sharpe(Total Volatility) Sortino(Downside Volatility) Absolute Premium Relative Premium 2011 177.8% 94.1% 83.7 pp 88.9% 2012 79.6% 49.8% 29.8 pp 59.8% 2013 145.2% 87.2% 58 pp 66.5% 2014 75.2% 46.3% 28.9 pp 62.4% 2015 69.1% 45.5% 23.6 pp 51.9% 2016 48.5% 30% 18.5 pp 61.7% 2017 93.7% 50.2% 43.5 pp 86.7% 2018 81.5% 53.3% 28.2 pp 52.9% 2019 68.1% 38.3% 29.8 pp 77.8% 2020 73.2% 48.7% 24.5 pp 50.3% 2021 80.2% 46.2% 34 pp 73.6% 2022 63.6% 42.3% 21.3 pp 50.4% 2023 43.7% 21.8% 21.9 pp 100.5% 2024 53.3% 28.3% 25 pp 88.3% 2025 (YTD) 44.1% 23.7% 20.4 pp 86.1% Average 79.7% 47% 32.7 pp 70.5%) or downside deviation (Sortino), we now add the Omega Ratio to our analysis because of the clarity it lends to measuring the entirety of the return ￰9￱ Omega Ratio evaluates the probability-weighted gains versus losses, making it especially valuable in non-normal or fat-tailed distributions, such as crypto or assets where extreme outcomes are ￰10￱ simplified version of the Omega Ratio, also known as Gain/Loss Ratio compares bitcoin’s cumulative positive returns against its cumulative negative returns, defining every unit of reward per unit of risk in a direct, linear ￰11￱ this case, we assume 0% returns as the minimum “hurdle” the investor would expect for holding the ￰12￱ with the Sortino Ratio, we believe the Omega Ratio portrays a more accurate measurement of risk-adjusted ￰13￱ provide color with respect to bitcoin, the chart below differentiates between the numerator and denominator of bitcoin’s Omega Ratio.), Bloomberg ￰14￱ Float Adjusted Index (LBUFTRUU, US bonds), MSCI US REIT Index (RMZ, US real estate), and LBMA Gold Price PM (GOLDLNPM, gold).), Bloomberg ￰15￱ Float Adjusted Index (LBUFTRUU, US bonds), MSCI US REIT Index (RMZ, US real estate), and LBMA Gold Price PM (GOLDLNPM, gold).), Bloomberg ￰16￱ Float Adjusted Index (LBUFTRUU, US bonds), MSCI US REIT Index (RMZ, US real estate), and LBMA Gold Price PM (GOLDLNPM, gold).), Bloomberg ￰17￱ Float Adjusted Index (LBUFTRUU, US bonds), MSCI US REIT Index (RMZ, US real estate), and LBMA Gold Price PM (GOLDLNPM, gold).).

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