During the market’s recent sell-off among both equities and bonds, we saw a surge in volatility. We also saw cryptocurrencies move lower as well. Over the past 1-2 years, both volatility and cryptocurrencies have come into the mainstream as asset classes traded outside of the “big four” asset classes – stocks, bonds, currencies, and commodities – to become their own source of returns. Some traders have chosen to exclusively specialize in either volatility or cryptocurrency trading, or at least added integrated it within their portfolios alongside other assets. Below I present two strategies on the WhoTrades Marketplace that effectively specialize in each. Volatility One of the more popular strategies on the Marketplace is a trader who focuses entirely on volatility. Most of his gains have come through shorting volatility, mostly through the products $XIV and $SVXY. Of course, with the recent market correction, $XIV and $SVXY are no longer active after the underlying index (VIX) doubled during the course of one day (or were briefly relaunched but shut down again), rendering the products valueless or close to it (a 100%+ gain for VIX means a -100%+ loss for the inverse). Fortunately, this trader benefited from the low-volatility environment over the past year and profited heavily by betting on inverse VIX products. At one point, he was up 247% when looking over the timeframe of the past year. It has since settled in at around 94%, with a maximum drawdown of 49%. (Source: Vol Trader) Currently, this trader is 100% long $VIXY, a VIX short-term futures product that bets on volatility increasing. As a general rule, being short volatility will result in slow, incremental gains as risk assets – stocks, real estate, high-yield bonds – appreciate. One can think of being long risk assets as an implicit short call on volatility. Being long volatility (using VIX, which is based on the S&P 500) is therefore basically a hedge on risk assets. In developed economies, risk asset markets tend to go up over time and bull markets are much lengthier than bear markets, making long volatility trades subject to elongated periods of fatigue. Short vol will tend to work well when central banks push liquidity into the financial system and the economy is moving at a steady pace with low inflation. But once the tide begins turning and central bankers start becoming concerned over wage pressures and higher inflation, the trade's risk dynamics change. Central banks begin lifting rates and/or removing any supporting stimulus measures (e.g., QE). If this comes alongside stretched valuations, the short vol trade becomes much more crowded and riskier. Volatility was once an exogenous metric independent of the market, but now that vol is an actual tradable commodity via the VIX index, a load-up of short gamma exposure also skews the risk dynamics of the market more broadly with potential bleed-through into rates, bonds, equities, and other asset markets. While explicit plays on volatility are one of the many trading tools investors now have at their disposal, trades must be deployed judiciously or not at all, as years of gains can be wiped out in a matter of hours as we saw recently. Cryptocurrencies This trader employs a concentrated strategy self-described as “combin[ing] the greatest US stocks with cryptocurrencies.” It’s roughly 50% Facebook ($FB) and 50% bitcoin (BTCUSD). (Source: Double Combo) This is a high-risk strategy combining a volatile, yet cash-producing tech company with a speculative cryptocurrency asset. Provided that bitcoin’s annualized volatility is around 10x-12x that of Facebook’s, to balance the risk out between the two assets, about 94% of the allocation would need to be in Facebook and 6% in bitcoin. Well over 90% of the risk in this portfolio is tied to bitcoin’s performance despite it being evenly balanced in monetary terms. Though cryptocurrencies are a relatively young asset class, we’ve seen so far that they generally correlate in line with risk assets. In the event of a sell-off in stocks, cryptocurrencies may not be particularly reliable as a “safe haven” given they are treated as “risk on” assets themselves. While bitcoin and other virtual currencies may have use as fiat alternatives in emerging markets to sidestep capital controls, they are likely perform erratically if used as a hedge similar to gold. Those who dabble in cryptocurrencies do so for different purposes – whether it’s purely speculation, circumstances related to domestic regulation of capital flows, misgivings pertaining to the fiat monetary system, an actual trading strategy based on momentum- or technical-based factors, or with regard to its fundamental value as a store hold of wealth, transactions medium, or through potential identification of buyers or sellers that could move the market. Conclusion Unorthodox trading strategies can be worth following on the Marketplace. Given the nature of volatility as an asset class and variability in the pricing models and range of motivations for trading cryptocurrencies, both of these markets move quickly. They can provide large gains quickly but also cause massive drawdowns. Or even wipe out an account entirely in the case of the “short vol” trade or cryptocurrency assets bought with leverage (or even without). Accordingly, it’s important to know what you’re trading and to understand the risks. Looking at various strategies on the Marketplace and following traders whose style appears interesting or jives with your own can assist with this process. You will also receive updates whenever a trade is made by a trader you’re following.