Bitcoin's BTC/USD Extreme Volatility Makes It Unsuitable as a Benchmark for Liquid Funds

Authored by Marcin Kaźmierczak, the report argues that while Bitcoin has delivered headline-grabbing returns, its risk-adjusted performance disqualifies it as a standard

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

What Happened: Authored by Marcin Kaźmierczak, the report, titled "Is Bitcoin Really a Suitable Benchmark for Liquid Funds," assesses Bitcoin's investment performance and compares it to traditional and decentralized fund benchmarks.

It argues that while Bitcoin has generated significant interest with large price movements and headline-grabbing returns, its risk-adjusted performance disqualifies it as a standard for measuring the success of capital preservation strategies, which is a primary goal of liquid funds.

The analysis showcases Bitcoin's Sharpe ratio ranging from -6.58 to 6.97, and 25% of the observations fell below -1.20, signaling high capital risk and inconsistency in capital generation.

These traits fundamentally contradict the core objectives of liquid funds, which prioritize stability in capital structure, efficient capital utilization for sustained income, and short-term liquidity.

“Volatility, risk appetite, and investment horizons reveal why benchmarking every fund to the Bitcoin performance is fundamentally flawed,” Kaźmierczak wrote, adding that "the reported 70% return rate offers a dangerously incomplete picture.”

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

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 the cryptocurrency's oscillations between extreme gains and severe losses.

These rapid shifts, the report argues, would expose charter members' portfolios to unacceptable levels of downside risk, especially for funds with short-term liquidity requirements and shorter time horizons.

Why It Matters: Karmierczak also highlights 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 factor in liquidity, yield, and risk attributes in a way that allows for more diverse investment strategies.

While the reported returns from these platforms, ranging from 25% to 45%, may trail simple BTC holding strategies, they represent a more sustainable approach by adopting professional-grade risk management frameworks.

The analysis showcases how new technologies like smart contracts and on-chain data unlock new avenues for capital generation and risk-adjusted performance measurement.

By utilizing 30-day rolling Sharpe ratios and a time-synchronized performance model to account for trading days and varying time periods, the report underscores the need to consider risk-adjusted returns in a broader context.