New „fear barometer“ for the crypto market allows a look inside the crystal ball
In October, crypto investors seem anxious.
The „Crypto Volatility Index“, abbreviated as CVX, is now entering the beta test phase. The index tracks the expected volatility, i.e. the range of fluctuation, in trading of crypto-options. The indicator works in a similar way to its role model on the stock market.
On the stock market, the „Volatility Index“ (VIX) is regarded as a kind of „fear barometer“, which often predicts violent price movements.
The CVX is based on comparable mechanisms, whereby this in turn is specifically tailored to crypto currencies and primarily takes into account options for the two market leaders Bitcoin (BTC) and Ether (ETH).
Options are derivatives of a financial product that literally give the trader the „option“ to buy or sell at a certain price at a certain point in the future. The trader „bets“, so to speak, on future developments, which is why he has to pay a fee in advance in order to have the privilege of entering or rejecting the option later. In turn, the fee due depends on various factors, including the expected volatility.
Expected volatility is in turn represented by what is known as „implied volatility“, which is derived from current option prices and thus provides an indication of the degree of market volatility expected by traders. This is therefore the basis for options traders‘ forecasts of future price developments. Of course, these forecasts do not necessarily have to be correct, but the indicator nevertheless provides information about the current mood in the market.
The volatility index, in turn, collects the various „forecasts“ and combines them into a key figure to provide an overall view of the market.
Similar to a stock index, the CVX can also be traded, allowing crypto investors to bet on whether volatility in the market will increase or decrease. The editors of the new index explain that, like the VIX, it is calculated using the Black-Scholes formula.
The CVX is a decentralised financial product offering a crypto token of the same name. Initially, volatility trading is possible for ETH and Tether (USDT), and the possession of CVX tokens is accompanied by voting rights for the future development of the platform.
The current beta version is currently still based on the option values of centralised crypto trading platforms such as Deribit, but soon options from DeFi projects will also be considered.
Currently, the index tracks the data of just over a month, with the CVX reaching its previous record high on October 21, when the crypto exchange OKEx imposed a temporary payout stop.
The current state of affairs at the end of October suggests that the crypto markets are in a heightened state of anxiety, although the index’s informative value remains weak so far given the short time horizon under consideration.
Over time, however, the CVX could become an important indicator, which is an important pointer for all crypto traders regarding future price developments.