Face Melting Volatility

Earlier this month, the CBOE launched an index that tracks the volatility of Bitcoin. Like VIX but for Bitcoin. The symbol for it on the CBOE website is BITVX but I couldn't find it quoting anywhere else yet, but I'm sure it will soon. 

And whammy

The filing indicates it will lever up 1.5x the BITVX. The volatility of Bitcoin is 50-100 according to Copilot versus usually being 10-20 for the S&P 500. If CBIX ever sees the light of day then depending on the methodology, the volatility could run 75-150. Even if the numbers mean nothing to you, you probably have a handle on how volatile the S&P 500 feels. If you're in touch with how volatile VIX is, its volatility runs 12-25. Again, all numbers from Copilot.

We've spent a lot of time trying to learn about volatility as an asset class and using it as a strategy. I feel like I've had good luck using BTAL and SH (been using SH off and on since the Financial Crisis). I've used a couple of other things too over the years with dual idea of avoiding the full brunt of large declines and generally reducing the overall volatility of the portfolio.

Volatility can play a role in barbelling a lot of return out of a small portion of the portfolio where that small portion theoretically gives the same dollar return that a normal allocation to equities would give. 

Portfolio 1 is 25% 3x Technology and 75% T-bills. It uses the volatility of technology to get market like returns with much less exposed to risk assets. While the long term result has worked out, the path going forward can't be known and as Dennis Eckersley might say, TECL goes down 40% just to stay in shape. 

TECL's volatility runs at about 40 which helps create some understanding of what CBIX might look like. The path that CBIX will take might be like trying to hold on to an M80. What's bigger than an M80? Is there some way to use CBIX to either capture returns or provide defense? I don't know but someone will figure that out.

I mentioned the other day that as the levered and capital efficient ETFs spaces continue to develop, I think the useful direction here will be funds that double up on the volatility not the daily result. They have fewer problems with the path of returns creating a terrible outcome like the 2x Tesla ETF.

 While I am comfortable using volatility for defense, I don't know about using it for offense like we're describing today for a barbelling of potential returns but it's worth studying. 

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