When calculating your strategy's Sharpe ratio, did you just casually write down 3% for the risk-free rate, or copy a random number from somewhere?
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Don't underestimate this number. For the same strategy, choosing a 3% versus a 5% risk-free rate can produce very different Sharpe ratios — pick the wrong one and you might throw away a good strategy thinking it's garbage. Let's get straight to the point and explain exactly how to choose this number.
Step 1: Understand What the "Risk-Free Rate" Does in the Sharpe Ratio
The Sharpe ratio formula:
Sharpe Ratio = (Average Strategy Return − Risk-Free Rate) ÷ Return Volatility
The "average strategy return − risk-free rate" part in the numerator is called excess return — how much more you earned by taking on risk compared to "earning money while doing nothing." The risk-free rate is that "doing nothing" benchmark.
The higher the benchmark you choose, the lower your excess return, and the more your Sharpe ratio gets dragged down. So this number cannot be filled in casually — it directly affects your true assessment of the strategy.
Step 2: Which One to Choose? Comparing Three Reference Rates
Case A: Use US Treasury Yields (Recommended)
In traditional finance, the risk-free rate defaults to short-term US Treasury yields. Currently, the 10-year Treasury yield is around 4.7%, and the 30-year is around 5.27% (source: Tradeweb, 2026-08-18).
Why this is recommended: This is the globally recognized risk-free benchmark. When comparing different strategies side by side, everyone uses the same yardstick. If your strategy can't even beat Treasury bonds, then taking on that risk isn't worth it.
Case B: Use Stablecoin Deposit Rates (Common in Crypto)
Many people in crypto use stablecoin deposit rates as the risk-free rate, such as Coinbase at around 3.5%, Kraken and Gemini at around 3.75% or higher (source: CoinDesk, 2026-08-16), and Robinhood Earn even reached 7% at one point (source: Robinhood announcement, 2026-07-02).
The problem is: Stablecoin deposit rates themselves include protocol risk and de-pegging risk — they are not truly "risk-free." Using this as the benchmark will lower your excess return and make your strategy look worse than it actually is.
Case C: Use Bank Deposit Rates (Not Recommended)
JPMorgan's savings rate is only 0.01%. Using this as the benchmark will inflate the Sharpe ratio of any strategy — because the benchmark is so low, everyone looks like they're "making big money," but that's an illusion with no meaningful comparison value.
Step 3: Practical Advice — What to Actually Use
[What to do]: Pick one source for the risk-free rate and use it consistently across your backtesting and live evaluation.
[How to do it]:
For internal strategy evaluation and comparing against historical data: Use the 10-year US Treasury yield, currently around 4.7% (source: Tradeweb, 2026-08-18). This is the industry standard, and the data is publicly available.
For comparing with other crypto strategies: If you're looking at strategy reports published by others, follow the benchmark they used — most will use Treasury yields or stablecoin rates. Just check the report notes and keep the basis consistent before comparing.
Never mix and match: Using Treasury yields this week and stablecoin rates next week will make your Sharpe ratios completely incomparable.
[Completion standard]: You clearly know what risk-free rate you are currently using and where it comes from. Write it down in your strategy documentation.
Common failure reason: Some people simply ignore the risk-free rate and treat the numerator as "average strategy return." What you calculate this way is not a Sharpe ratio — it's just a "return-to-volatility ratio," and the number will be artificially inflated, misleading you into overestimating your strategy's efficiency.
Risk warning: The risk-free rate itself changes over time — at the beginning of 2026, the 10-year Treasury yield was around 3.96%, and by mid-year it had reached 4.7%. A Sharpe ratio of 1.8 calculated at the start of the year might only be 1.5 when recalculated mid-year with the same strategy — not because the strategy got worse, but because the benchmark changed. So when calculating, clearly note the calculation date and the risk-free rate used at that time.
FAQ
Q: Should the risk-free rate be daily, monthly, or annual?A: Match it to your strategy's return period. If you calculate returns monthly, convert the risk-free rate to a monthly rate as well (annualized 4.7% ÷ 12 ≈ 0.39%).
Q: I'm based in China — can I use Chinese government bond yields?A: Yes, but the Sharpe ratio you calculate will differ from using US Treasury yields. The key is to stay consistent over time — use the same benchmark when comparing against your own past results, and when comparing with others, check what benchmark they used before converting.
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Next Step
Open the spreadsheet where you calculate your Sharpe ratio and confirm where the risk-free rate you're currently using comes from and what date it's from. If you filled it in casually before, change it today to the 10-year US Treasury yield (currently around 4.7%) and recalculate.
The result may be lower than before — but that's your true performance. Don't fool yourself.
