Upside risk and return timing in Bitcoin

Abstract

This paper studies the benefits of timing Bitcoin returns by upside and downside volatilities. Standard volatility management implicitly treats volatility spikes as signals of adverse states, reducing exposure when total volatility increases. However, in Bitcoin, volatility spikes are frequently due to price rallies, which typically indicate subsequent positive returns. We show that semivolatility timing rules that account for both downside and upside risk concerns yield substantially stronger risk-adjusted performance than buy-and-hold and volatility-managed strategies. This stems from the fact that high upside-driven volatility states in Bitcoin are disproportionately associated with positive returns in the next period.