Volatility Trading on the Digital Asset Markets

The volatility of the digital asset markets has proven to be substantially higher than any regular equity market. In many cases, it’s provided entry barriers for a regular investor to be allocating funds to the crypto markets, as the volatility is deemed too high, and, therefore, the asset class was deemed too risky.

Volatility isn’t the same as risk and that’s why one of the core anchors of the fund is to be utilizing the volatility trading in our favor.

Buy and Hold vs. Volatility Trading

This chart shows the price fluctuations of Ethereum in EUR over the past five years. The highest price value for Ethereum was nearly €4,000 during the previous bull market in 2021.

However, if any regular investor has been looking to allocate in Ethereum from 2021 until now, the overall returns would have been negative or close to 0% by simply buy-and-holding the asset.

Despite the fact that during this period, the price of Ethereum has seen multiple rallies from under €1,500 to above €3,400.

Passive investment into the markets isn’t the best strategy anymore, and the volatility and price fluctuations of Ethereum do prove this specific point, which makes it an ideal recipe to be looking at the concept of volatility trading.

What is volatility trading?

Volatility trading is a concept that’s quite often being used within the equity markets or options traders. The reason for that is that you can simply trade the volatility index or you can trade volatility through options (with several sophisticated complex strategies that are low in risk, and therefore relatively high in Sharpe). 

This market is saturated almost entirely, as there’s no clear return (or alpha) to be generated anymore. That’s why the phrase ‘volatility trading’ might have different expressions and you could also use the phrasing ‘multi-layer grid trading’. 

In easy words: buying at a low price, selling at a higher price, although doing that on a fraction of any price movement in order to capture a percentage of the daily volatility of the underlying asset.

Quite often you’ll find bots on several exchanges in which you’d be able to do this strategy in a simplistic manner, however, that won’t provide the return that you’d be looking for as the complexity of such a strategy is substantially higher within the crypto markets.

How does volatility trading work in reality?

This is an example of the trading that has been done through our algorithms. The underlying asset provided a drawdown of 6.2% by simply holding the underlying asset over a period of one month: February 2026.

In the same time, by simply executing the automated volatility trading strategy on the markets, a realized return of 8.6% was established on the same underlying assets, which creates a gap of nearly 15% between the two strategies, referenced to as the underlying alpha generated by the strategy that the fund trades.

The strategy is fully automated and executed through algorithms, in which the trading can be done 24/7. On a regular monthly basis, an average of 45,000-60,000 trades are done, which means 1,500-2,000 trades on a daily basis on several trading pairs simultaneously.

The system is designed on multiple levels, as many factors might influence the volatility and therefore the return of the underlying system. Some examples are:

• The trend of Bitcoin vs. USD. If Bitcoin is downtrending, it’s very likely to expect that there’s no upwards return to be made with altcoins at all. 

• The trend or regime of the underlying assets. There are several regimes to be recognized within the market structure, and due to those regimes, the settings of the system need to be adjusted accordingly. 

• The correlation between the assets that we’re trading. A high correlation can be beneficial in certain trends, but in other cases you’d like to be as uncorrelated as possible.

The system can’t execute trades on all pairs, as liquidity constraints, spread, low volatility or wrong regime could prevent the system from trading on those pairs in order to generate a return.

How do you manage a crash in the digital asset markets?

The markets have completely changed since October 10th, 2025. Liquidity has been gone since the crash took place, and it’s been a challenging day for anyone active in the Web 3 ecosystem as an investor. Many altcoins corrected by more than 70% in a single hour and quickly bounced back upwards.

This was a true stress test for the system in an extreme form, as the event itself is the heaviest outlier the markets have ever seen, even heavier than the COVID-19 crash in March 2020.

However, until date, that particular day has been the most profitable day for the strategy as the liquidity, volatility and volume have been the highest until date. That’s exactly the system that the fund aims to be build, to be utilizing the outliers of the markets in our favor in an active approach.