The Sharpe ratio divides a strategy's average excess return (over a risk-free rate, often approximated as zero for simplicity in crypto) by the standard deviation of its returns. Two strategies with identical average returns can have very different Sharpe ratios if one achieves its returns smoothly and the other via a wild, volatile ride, the smoother one wins on Sharpe even though the raw returns tie.
It's a useful single-number way to compare strategies (or the same strategy across regimes) on a risk-adjusted basis rather than on raw return alone, since raw return says nothing about how much volatility, and therefore how much emotional and financial risk, was tolerated to earn it.
Sharpe has a well-known limitation: it penalizes upside volatility the same as downside volatility, even though a strategy with occasional huge wins (which raises the standard deviation) isn't actually undesirable the way one with occasional huge losses is. Metrics like the Sortino ratio (which only penalizes downside deviation) exist specifically to address this asymmetry.
Educational content, not investment advice. zengtrade is paper-first and non-custodial.