Trading Strategies for Volatility Tokens
♫ 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
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.
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.
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).
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).
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.
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