Bitcoin's Volatility Makes It Unfit As A Benchmark For Liquid Funds: Report

Bitcoin's BTC/USD extreme volatility makes it unsuitable as a benchmark for liquid funds, according to a new report from RedStone Oracles.

What Happened: Authored by Marcin Kaźmierczak, the report argues that while Bitcoin has delivered headline-grabbing returns, its risk-adjusted performance disqualifies it as a standard for measuring the success of capital preservation strategies.

The analysis shows that Bitcoin's Sharpe ratio ranged from -6.58 to 6.97, and 25% of observations fell below -1.20, metrics that signal high capital risk and inconsistency.

These traits contradict the core objectives of liquid funds, which prioritize stability, capital efficiency and liquidity.

“Volatility, risk appetite, and investment horizons reveal why benchmarking every fund to the Bitcoin performance is fundamentally flawed,” Kaźmierczak wrote, noting that return rates alone offer a dangerously incomplete picture.

Even when compared to growth-oriented traditional indices like the S&P 500, which itself may be too volatile for many liquid fund mandates, Bitcoin underperforms in terms of stability.

The report notes that Bitcoin saw a -49.22% drawdown between January and September 2024, while the S&P 500’s largest decline during the same period was -15.59%.

The standard deviation of Bitcoin's Sharpe ratio, calculated at 2.72, highlights frequent oscillations between extreme gains and severe losses.

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These sharp swings, the report argues, expose portfolios to unacceptable downside risk, especially for funds with short-term liquidity requirements.

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Why It Matters: Kaźmierczak also emphasizes the difference in performance evaluation frameworks now emerging in on-chain finance.

Platforms like Morpho and Euler are enabling fund managers to structure "vaults" that optimize for liquidity, yield, and risk.

While returns from these platforms may trail simple BTC holding strategies, they represent a more sustainable approach by adopting professional-grade risk frameworks.

By using 30-day rolling Sharpe ratios and controlling for trading days, the report builds a time-synchronized performance model, underscoring the need to consider risk-adjusted returns rather than chasing linear growth metrics.

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