The Crypto Volatility Index launched: will it become an important tool for traders?

Strong fear among crypto options traders in October: do you still feel the impact of the OKEx affair?

The Crypto Volatility Index, or CVX, has just been launched in beta: the index tracks the implied volatility of crypto options in a similar way to the volatility index used in the stock markets.

VIX is usually defined as „the fear index of the stock market“, as it often increases in anticipation of major downward movements.

VIX uses a very similar mechanism: it tracks the implied volatility of a basket of crypto options, mainly on Bitcoin Method (BTC) and Ether (ETH).

Options are a derivative product that gives buyers the ability, but not the obligation, to buy or sell an asset at a certain price at a certain future date. In order to do so, traders pay sellers a premium, which generally depends on factors such as the time until the option expires and general expectations of future volatility, called implied volatility.

Implied volatility should indicate, therefore, how much traders think a certain asset will move in profit or loss, and differs from realised volatility, which indicates how much the asset has actually moved. Because of this, it can be considered an important indicator of large price movements, although option traders may not always be accurate in their forecasts.

The volatility index aggregates these forecasts through a variety of options to provide a general overview of the market.

The CX could also be traded, allowing investors to „hedge“ their movements by betting on the volatility trend. The team stated that it works very similarly to VIX, using the Black-Scholes formula to calculate the volatility implied by option premiums.

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

The current beta version is based on centralised option platforms such as Deribit, but in the future it is planned to include DeFi protocols as well.

The index currently only includes data from just over a month ago, but still highlights moments of high fear such as the inconvenience OKEx users faced when withdrawing their funds, which triggered the CVX peak around 21 October.

Overall, the crypto market seems to be in a state of high fear from the end of October, although it is difficult to judge the importance of these values without a longer time horizon.

As the index matures, it may become an important tool in a trader’s arsenal to assess market forecasts for future price trends.

It is necessary to underline, in any case, as the crypto derivative platforms are still in embryonic phase: the data on the implicit volatility seen now could not always have sense to the eyes of veteran traders.