Volatility is a part of any market, and the Crypto Volatility Index or CVI brings a new set of tools to an evolving sector of the global financial markets. The past few years have seen a wide range of new tools emerge in the crypto space – but one has been lacking.
A volatility index is a vital part of any financial market, and the CVI does a great job of creating a gauge for measuring the forward-looking expectations for volatility in the crypto markets.
In truth, the CVI is a lot more than a simple volatility index. It is a new liquidity ecosystem that offers $GOVI token holders a say in how the platform is governed, and also offers returns for liquidity providers.
The CVI is Here!
Volatility is the core of any market, but until now, there hasn’t been a dedicated metric to measure crypto market volatility. Much like the VIX, which measures the expectations for volatility in the S&P 500, the CVI measures a range of popular crypto assets.
It is important that a volatility gauge has a wide range of assets, especially in the crypto markets, as many tokens move quickly and in large percentage terms.
Instead of focusing on a few tokens, the CVI is based on the Black-Scholes option-pricing model and uses a broad base of both exchanges, and token to create a reading of between 0 and 200.
In addition to offering a great tool for traders and investors, COTI, the company that created the CVI, also created the $GOVI token that makes the CVI ecosystem work for everyone involved.
$GOVI Makes Sense
COTI created the $GOVI token with open source ideas in mind. The token is based on ERC-20 architecture and is used for a number of purposes in the CVI ecosystem.
The $GOVI token is used for platform governance, and allows holders to vote on how the CVI is structured, and also can be staked to gain rewards in the form of sharing platform fees.
Like any ERC-20 token, $GOVI is freely tradable and can be used as a means of payment with anyone that sees value in the CVI platform – which isn’t difficult to do.
Why Does Volatility Matter?
In many markets, volatility is a bad thing, but with the explosive growth that cryptos are undergoing, volatility can mean big gains, and also big falls in token prices (at least in the short term).
However, when markets move, many traders and investors may want to be able to hedge those moves. Until now, this has been difficult, and there was no volatility-specific toolset to use.
Hedging with volatility makes a lot of sense. Let’s say that a trader is short the market, and they want to have some amount of hedging in place.
Without a volatility-specific hedging tool, the only way to hedge a short position is to buy the markets long, and likely across a range of tokens that may or may not replicate the actual performance of the price action.
A volatility gauge that can be traded like the CVI changes this dynamic completely.
Instead of buying protection via long positions, a trader can buy volatility, which can actually appreciate if the market goes down, or up.
While a volatility index will likely fall in value with positive price action, a large move up will probably make it gain in value, as would a sharp fall in crypto market prices.
There is no such thing as a perfect hedging tool, but the CVI creates more options for crypto traders that want to ensure that they aren’t taken by surprise when the market moves quickly. Buying protection via the CVI is one way to use the index, but there are others as well.
When volatility evaporates from the market, anyone who wants to create profits can sell volatility in the form of options. While this is a risky way to make money, for a trader with large long positions, selling volatility short can create profits even if the markets are trading sideways.
Trading Volatility Can Create Profits
Before the CVI, there wasn’t much in the way of a standard gauge for crypto market volatility. This isn’t just a drawback for traders – exchanges were also limited in what kind of products they could offer.
The CVI is built to be used across the crypto ecosystem and allows major exchanges to use the data that the CVI produces to offer new volatility-linked products to their clients.
It may also help drive the crypto options markets into further development, as volatility is one of the major pricing factors for an options pricing model.
For the moment, the CVI’s trading platform allows traders to go long, or buy the index, and for liquidity providers to go short, or sell the platform. In essence, this is like buying insurance for the traders, as they would be protected from big crypto market movements that push volatility higher.
As more platforms adopt the CVI as a tradable product, there are likely to be more financial products to choose from. Both futures and options can use the CVI as a basis for contracts, and both could conceivably be both bought and sold.
The CVI is also a handy tool for anyone who wants to have an ‘at-a-glance’ view of the crypto markets, as a high CVI reading is likely to represent fear of a big move in the markets or one that already underway.
How to Trade the CVI
If you want to buy the CVI as protection against large market moves or to speculate on rising volatility, it is pretty easy to do so.
According to COTI:
In order to trade in the platform, all you have to do is to connect your Metamask or WalletConnect wallet → go to “Platform” → click on “Manage your positions” → select the currency you want to buy the CVI index with → insert the amount → Click on “Buy”. Please note that you will also get $GOVI tokens each time you buy CVI position. You can claim them to your wallet in the Claim tab.
It is equally easy to become a liquidity provider.
COTI states that:
In order to provide liquidity, first connect your Metamask or connect with WalletConnect. Afterwards go to “Platform” → click on “Manage your liquidity” → select the currency you want to deposit → insert the amount you wish to deposit → Click on “Deposit”. Liquidity providers also earn a share of the pool premiums based on the amount of liquidity they provide and the time during which their liquidity remains in the pool. Once you deposit liquidity you will get an LP token that you can stake in the “Manage your tokens” → Stake tab to earn $GOVI tokens rewards
While the CVI is still a new product, it will likely see widening use in the coming years. The equivalent index in the US equity markets, the VIX, is widely used.
There is no reason to think that the CVI will be any less successfully adopted, and it actually offers some advantages, like direct tradeability and rewards for liquidity providers, which make it a very attractive platform.