Previously, we covered the motivation for low volatility assets. Here, we’ll cover the motivation for high volatility assets; and discuss their interdependencies.
Broadly, the more capital you have under management the more likely you're to value stable risk-adjusted returns. 20% ARR with minimal drawdowns every few years is incredibly compelling if you’re managing $10B of capital (because $2B a year goes a long way); but what if you’re managing less or looking to move faster?
Where low volatility assets are designed for wealth accumulators, high volatility assets are for traders who want to take on more risk in exchange for faster potential returns. This market for convenient leverage is currently served by leveraged ETFs in equities markets and perpetual futures in the crypto markets; the latter of which doubled to $58.5T in trading volume in 2024.
Bitcoin and gold are uniquely positioned to benefit from geopolitical risks and inflation risks, making their leveraged derivatives increasingly appealing. Anyone who believes these assets are likely to grow, but wishes they were in at an earlier stage, might consider holding high volatility derivatives. Moreover, such offerings can benefit from robust pre-existing liquidity by competing on performance and convenience.
Portfolio Construction Opportunity
Recall the Fragments protocol expands the use case of underlying assets by reorganizing their volatilities into Sr and Jr perpetual tranches. This means you can vary your exposure simply by holding a portfolio of Sr's and Jr's:
Example: Let's say the volatility multiple of the SrBTC is (1/5th) bitcoin and the JrBTC's is (3x) bitcoin. You can create any volatility multiple in the range of [0.2x, 3.0x] by holding a combination of SrBTCs and JrBTCs.
Expanding on this, dynamic strategies can be constructed by modulating between JrBTC and SrBTC exposure based on momentum or other considerations.
Bidirectional Yield Opportunity
The Fragments protocol employs a bidirectional funding rate. That is to say when demand for (Jr > Sr) funding flows to holders of the Sr; and when demand for (Sr > Jr) funding flows from holders of the Sr to the Jr.
One way stakers can harvest this funding rate continuously, is by holding Sr’s when the system is paying out to Sr holders; and then switching over to a combination of Jr’s and stables when the system is paying out to Jr holders. This has the added benefit of applying counter cyclical demand to the system, keeping it in balance.