Crypto ‘fear index’ can now be used to peek into the future

Crypto ‘fear index’ can now be used to peek into the future

October 31, 2020

The Crypto Volatility Index, or CVX, is now live as a beta test and proof of concept. The index tracks the implied volatility of crypto options in a similar fashion to the volatility index used in stock markets.

The VIX is usually referred to as the “stock market fear index,” as it often spikes in anticipation of major downward moves.

The CVX operates under a very similar mechanism. It tracks the implied volatility of a basket of crypto options, primarily for Bitcoin (BTC) and Ether (ETH).

Options are a derivative product that gives buyers the option, but not the obligation, to purchase or sell an asset at a certain strike price and at a certain date in the future. To be able to do this, they pay sellers a premium, which generally depends on factors such as the time until expiry and the overall expectations of future volatility, called implied volatility.

Implied volatility refers to how much traders think a certain asset will move either higher or lower, and it differs from realized volatility, which is how much the asset actually moved. Due to this, it can be considered a leading indicator of large price movements, though options traders may not always be correct about their predictions.

The volatility index aggregates these predictions of the future across a variety of option premiums to provide a generalized overview of the market.

The CVX could also be traded, allowing investors to hedge their bets by betting on volatility to go higher or lower. The team said that it works in a very similar way to the VIX, using the Black-Scholes formula to calculate implied volatility from option premiums.

The CVX is a decentralized finance product that features its own governance token under the same name. The protocol will initially support volatility trading with ETH and Tether (USDT), while CVX tokenholders will be able to make some of the decisions about the future of the platform.

Nevertheless, the current beta version relies on centralized options platforms like Deribit. In the future, DeFi protocols for trading options are expected to be included as well.

The index currently includes data for just over a month, but it highlights moments of elevated fear such as the OKEx withdrawal issues, which triggered a CVX all-time high around Oct. 21.

Overall, the crypto market appears to be in a state of elevated fear as of late October, though it is difficult to judge the significance of these values without a longer track record.

As the index matures, it may become an important staple in a trader’s arsenal to see what the market is predicting for future price action.

Crypto derivatives platforms remain somewhat underdeveloped though, and implied volatility figures seen now may not always make sense when analyzed by veteran traders.

Source: Read Full Article