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Volatility target strategy

A volatility target strategy aims to systematically rebalance portfolio allocations between:

  • A Risky asset (e.g., Bitcoin);
  • A Riskless asset (e.g., Stablecoins).

The algorithm adjusts these allocations dynamically based on market conditions, ensuring that the portfolio's volatility aligns with predefined targets. This approach is designed to mitigate downside risk while capitalizing on the market gravitation (i.e., the cyclical nature of the market). During phases of high market instability, the algorithm reduces exposure to Risky asset and favors the Riskless asset. Conversely, during periods of growth and low volatility, the allocation to Risky asset increases.

For example, Vol Target Bitcoin adjusts its exposure between Bitcoin and USDC depending on market volatility. During periods of high instability, it might allocate 50% to USDC and 50% to Bitcoin, protecting the portfolio from excessive losses. When markets stabilize, the allocation to Bitcoin may increase up to 100%, capturing growth potential.