20 Jan 2023
Crypto Volatility Index: The VIX of Crypto
The Crypto Volatility Index, or CVI, serves as a decentralized version of the VIX (CBOE Volatility Index) for the cryptocurrency market. It allows users to protect themselves against fluctuations in market volatility and the potential for impermanent loss.
Volatility trading is poised to be a significant advancement for the DeFi sector, providing traders with yet another way to profit from the inherently volatile nature of the cryptocurrency market. With this in mind, active traders, hedge fund managers, and institutional investors require tools to track the crypto market's volatility. Experienced traders may resort to riskier strategies such as long straddles and strangles without such tools.
The emergence of the derivative market has also highlighted the need for solid pricing strategies and reliable risk measures. There is a growing demand for a new decentralized volatility index that can accurately estimate the risk measurement of various cryptocurrency components and deliver market status information to potential investors.
A Crypto Volatility Index (CVI) was proposed, a revolutionary and first-of-its-kind decentralized VIX for the crypto market to meet this need. CVI is designed to be decentralized, dynamic, unbiased, and not connected to any exchange. This will enable traders to hedge themselves against volatility or lack thereof, giving them greater control over their investments and risk management strategies.
CVI is an innovative and replicable benchmark for cryptocurrency volatility information. It was created by the COTI team, which has partnered with Prof. Dan Galai, the creator of the original VIX, to create a "market fear index" for the crypto market.
The index tracks the 30-day implied volatility of Bitcoin and Ethereum. The index ranges between 0 and 200 and is produced based on a Black-Scholes option pricing model, which calculates the implied volatility of cryptocurrency option prices by analyzing the market's expectation of future volatility.
Trading the CVI Index is an effective way to discover profitable trading opportunities in the market without having to predict the direction of the price. Traders can profit from volatile markets, whether the prices increase or decrease, allowing them to hedge against market volatility and impermanent loss.
Additionally, the CVI is decentralized and not connected to any exchange, making it transparent and unbiased. The CVI team also provides a detailed breakdown of the index's methodology and calculations, ensuring replicability. CVI offers a reliable and informative benchmark for cryptocurrency volatility information, providing investors with a valuable tool for risk management and investment strategies.
The Crypto Volatility Index (CVI) is a valuable tool for understanding the expected volatility of the crypto market, developing trading strategies for short-term gains, and hedging portfolios against price fluctuations. The index is modeled after the VIX, widely used in traditional markets to assess volatility and risk.
By using the CVI, investors can gain insights into the crypto market similar to those provided by the VIX for traditional markets. This allows them to make informed investment decisions and implement effective risk management strategies.
There are a variety of trading strategies that users can implement using the CVI Index. Here are three examples of common strategies:
- Black swan – Hedging Strategy: In this strategy, a trader buys CVI if they expect a large-scale shock to affect the whole market. If a market downturn occurs, the trader can make substantial gains from the trade. For example, if a trader entered the market in early February 2020 when the CVI level was at 50, they could have made a 260% profit by closing their position when the CVI level was at 180 a few days later.
- Overheated market – Hedging Strategy: In this strategy, a trader opens a long position in the CVI Index when volatility is rising in the market. For example, if a trader starts buying into CVI in the last days of August, the gains from their long position in the CVI index would have compensated most of their losses in Ethereum throughout September.
- Back slope – Speculative Strategy: A trader sells CVI when the index goes down after a sharp surge. This strategy is more sophisticated and requires more analysis, but on average, it can be more profitable than the others.
Overall, the CVI offers a reliable and informative benchmark for cryptocurrency volatility information, providing investors with a useful tool for risk management and investment strategies. With the CVI, traders can have the same insights into the crypto market as those who follow traditional markets have with the VIX.
In summary, CVI is a revolutionary and first-of-its-kind decentralized VIX for the crypto market that allows users to hedge themselves against market volatility and impermanent loss. Furthermore, it is a new decentralized volatility index that provides a proper estimation of the risk measurement of the cryptocurrency components and delivers market status information to potential investors.
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Disclaimer: Nothing on this site should be construed as a financial investment recommendation. It’s important to understand that investing is a high-risk activity. Investments expose money to potential loss.
