Trading Strategies for Volatility Tokens

For investors and traders

♫ So… so you think you can tell ♫ Heaven from hell ♫ When to short ♫ When to long ♫ So you think you can tell… - Pink Floyd, Wish You Were Here

The Investor

If you’re a long-term investor, you can earn passive income on volatility tokens. Here’s how:

Buy low. Lend to short sellers. Receive lending fees every day.

Short seller — a person who borrows the asset and sells it on market, hoping for a price decline.

Guilty pleasure

However, this strategy requires timely execution to be profitable: you have to buy really low, so that your passive income is not outweighed by the price decline.

How low is low? Take a look at historical volatility chart (example for BTCV, Bitcoin Volatility Token). Here, we can see that values below 2.5 are pretty safe, which translates to buying BTCV below $0.025.

Besides that, you can estimate how much you can earn in lending fees. For that, let’s check lending fees for Bitcoin itself. According to bfxrates.com, they normally fluctuate between 2–7%, occasionally shooting up to 35%.

The Short Seller

What goes up must go down. If you believe that Bitcoin volatility will decrease over time, you can build a short position:

Borrow volatility tokens from investors. Open a short position when the volatility is high. Close your position when the volatility is low.

Be the red candle you want to see on the chart

In order to make a profitable trade, there are two things you need to care about: entry price & lending rate.

A word of warning: don’t determine the entry price by the volatility chart. Instead, use the price chart of underlying asset (which is Bitcoin if you’re trading Bitcoin Volatility Token) & time your entry to the beginning of a range after a huge move. This is always marked by the “automatic rally” from the lows (for example, check the orange arrows on the XBTUSD daily chart).

Orange arrows mark the start of automatic rallies

Securing a good lending rate is pretty easy — just borrow the tokens before the volatility kicks in.

The Bottom Buyer

It’s always “calm before the storm”. If you believe that Bitcoin volatility will increase soon, you can build a long position:

Buy the bottom. Wait until volatility increases. Sell into liquidations of short sellers.

Liquidation — a forced buy order that is placed automatically by exchange when a short seller deposit is not enough to cover the losses (for shorts).

Liquidated bears are my favorite bears

The short sellers may be underestimating the power of Bitcoin. When they build overleveraged positions, it’s time for a good old short squeeze. Take a long position before volatility increases & enjoy the smell of forced liquidations in the morning.

Pro tip: close your position at lower-than-mark price to ensure that you’ll get a fill & realize your profit.

What strategy should I choose?

If you’re not a trader, stick with investing & earning passive income from lending Bitcoin Volatility Tokens to short sellers (see the first section of this article).

If you’re an active & experienced trader, feel free to try your hand at picking the top of Bitcoin volatility. The payout can be immense, as volatility multiples can easily reach 20x.

If you’re a swing trader who knows how to spot upcoming breakouts (hint: look for long price ranges with low volatility), you can buy the bottom of BTCV pretty safely. The same volatility multiples of 20x applies to long positions as well.

… and if you’re loomdart, you can just long every bottom & short every top. Please leave some liquidity for retail traders, thanks.