In Correlation to bull/bear volatility insight we explored the relationship between ALPHA BTC portfolio returns and Bitcoin’s realized volatility. As it suggested, the higher the Bitcoin realized volatility (RVOL index), the higher the average portfolio returns. And vice versa, irrespective if the volatility occurs in a bull or bear market. While this insight explored the relationship to volatility from a market context perspective, correlation describes its strength and consistency.
Alpha BTC monthly returns have a 0.30 correlation to RVOL, a relatively strong correlation in financial markets given any known inefficiency is quickly exploited. Average monthly ALPHA BTC portfolio returns have 0.97 correlation to RVOL intervals. This suggests a positive, consistent and monotonous relationship. In a portfolio constructed to create alpha returns (above BTC benchmark), this is desirable as it indicates the strategies well capture price dislocations and mispricing inefficiencies from elevated volatility to create those alpha returns.
Source: Hedge Capital, ALPHA BTC return correlation to RVOL, a proprietary
30-day rolling realized volatility index of daily OHLC price.
How is this useful to an investor? It provides a simple framework for managing one’s expectations for upside returns and downside risk. As you may review in Correlation to bull/bear volatility insight, if RVOL averages above 60-65, risk-adjusted returns have Sharpe ratio above 3 and average returns grow linearly with growing volatility (see above). On the risk side, when average RVOL is around 50 as it has been since summer 22’, average returns are still around 1%. This is a useful insight that stops the urge to time the market with investment decisions waiting for the volatility to pick up. Why? It demonstrates it’s viable to be fully invested in Alpha BTC portfolio without large downside risk in order to fully capitalize on significant returns that come randomly in about 30% of the time and make up most of the total returns.
Leading up to mid 2024 Bitcoin halving average RVOL values may be closer to 70-90 as observed before the previous three halvings. If history rhymes, Glassnode analysts expect a volatile price range between $20-45k, their detailed analysis is worth a read.