The London-based Marex financial services platform has introduced a volatility-adjusted trading strategy linked to bitcoin (BTC), the dollar index futures (DXY), and ether (ETH). This is to help investors who are concerned about the high price volatility in the crypto markets.

Marex has already begun marketing the strategy to its clients. The strategy gives equal weight to Bitcoin and Ether, while the DXY Futures act as a hedge.

The basket is constantly rebalanced to achieve an annualized volatility target of 8%. When volatility increases, the strategy reduces exposure to risk assets – BTC and ETH – and increases exposure DXY. When volatility drops, the basket rebalances towards BTC and ETH.

The strategy uses the DXY as a safe-haven asset and bitcoin and Ether’s tendency to act like risk assets in order to keep the portfolio’s net volatility exposure as close as possible to the target value, regardless of market conditions.

Mark Arasaratnam (co-head of Digital Assets at Marex) said via email that this is the first institutional grade FX strategy and crypto volatility targeted strategy. It’s aimed at investors who want to get some exposure to cryptocurrency but are worried about its volatility.

Arasaratnam said that DXY is a strong complement to the portfolio of long-only investments, both from a thematic as well as an empirical perspective.

Graphical presentation of the long-only strategy tied to BTC (Marex), ETH (Marex), and DXY

According to Marex’s pitch, at the current volatility level, the strategy would give a 12% allocation to digital assets, and the remainder to DXY futures.

Crypto proponents hail bitcoin as a “safe haven” asset. However, empirical evidence shows that the top cryptocurrency has seen major gains during periods of sustained weakness in the U.S. Dollar. The dollar is a safe haven in times of uncertainty and acts as a hedge.

Over the last three years, there has been a consistent negative correlation between these two. The DXY component ensures lower volatility and drawdowns.

(Marex) (Marex) The long-only basked strategy tied to BTC ETH DXY has generated higher returns than the traditional buy and holds strategies since early 2021. (Marex) (Marex)

Marex’s research suggests that the basket using DXY to hedge the asset would have generated 29% return between Jan. 1, 2020 and June 30, 2023. (A period which includes both bullish as well as bearish trends). This is a much higher return than classic buy-and hold strategies.

Parikshit Miishra is the editor.