The cryptocurrency volatility indicator, or CVX, can now be used as a beta test and proof of concept. The index tracks the implied volatility of cryptocurrencies in the same way as the volatility indicator used in stock markets.
The VIX is commonly referred to as the “stock market fear indicator” as it often rallies in anticipation of significant downside moves.
CVX works in a very similar way. Tracks the underlying volatility of a basket of cryptocurrencies, primarily Bitcoin (BTC) and Ether (ETH).
Options are a derivative product that gives buyers the opportunity, but not the obligation, to buy or sell an asset at a specified redemption price and on a specified future date. To do this, sellers pay a premium, which usually depends on factors such as maturity and general expectations of future volatility, called implied volatility.
Implicit volatility refers to the degree to which traders believe that a particular asset will move up or down, and differs from realized volatility, that is, how much the asset has actually moved. For this reason, it can be considered a leading indicator of significant price movements, although options traders may not always meet their expectations.
The Volatility Index combines these expectations for the future with a series of option premiums to provide an overview of the market.
CVX is also tradable, allowing investors to hedge their bets by placing bets on the increase or decrease in volatility. The team said it works very similarly to the VIX, using the Black-Scholes formula to calculate implied volatility based on option premiums.
CVX is a decentralized financial product that has its own administrative code under the same name. Initially, the protocol will support volatility trading with ETH and Tether (USDT), and CVX token holders will be able to make some decisions about the future of the platform.
However, the current beta is based on centralized options platforms like Deribit. The inclusion of DeFi protocols for options trading is also expected in the future.
The index currently contains data for a little over a month, but it highlights moments of growing concern, such as OKEx drag issues, which led to a record high for CVX around October 21st.
Overall, the cryptocurrency market seems to be in a state of heightened fear since late October, although it is difficult to assess the significance of these values without longer tracking.
As the indicator develops, it can become an important element in the trader’s arsenal, who knows what the market expects from the future price movement.
Crypto derivatives platforms are lagging somewhat behind, and the implied volatility numbers we see now may not always make sense when analyzed by experienced traders.