How the Crypto Volatility Index Realizes the Advantage of Market Downturns
Luis Martim Aureliano is an independent crypto financial analyst, consultant.
In its early days, the crypto market was very one-sided. You could speculate on the upward market appreciation, but capitalizing on the downside was limited. Until the introduction of accompanying derivatives such as futures and options zero-sum in nature, hedging positions or betting against the market was difficult.
Now, within this expanded universe of derivatives and synthetic instruments, these strategies are not only possible but easy to implement. Even leveraged margin trading is available on many established exchanges. Still, the qualities of the crypto market have revealed some weaknesses in exotic instruments designed to capture directional moves up and down.
The latest price drop underscored this point after BinanceThe leveraged DOWN tokens did not perform as expected during the fall in prices, sparking outrage from users. Tokens, which are expected to benefit from the price cuts, have done the opposite in some cases. Despite the risk disclosure, the exchange quickly noted that the token rebalancing mechanism was working as intended, despite the resulting losses for investors in these products.
Fortunately, some products have been shown to deliver as advertised, and among them is COTICrypto Volatility Index (CVI). COTI’s CVI index responds to a hitherto unmet need in one of the most explosive and unpredictable markets: the opportunity to capitalize on the dizzying volatility of the market.
The VIX redesigned for crypto
Professor Dan Galai, one of the pioneers of Chicago Board of Directors Options Exchange‘s (CBOE) Volatility Index (VIX), brought its vast experience to the crypto arena through the unprecedented application of the same underlying principles. As a researcher and member of the advisory board of the COTI team, Galai shares his expertise in risk management and other areas to ensure a functional product.
Since launching CVI’s mainnet, results have reflected the skills of the team, with a recent price drop testifying to its success. In mid-May, the downturn in major cryptos and the subsequent sell-off on May 22, CVI performed as expected, reaching record highs as volatility increased.
In addition to proving that the CVI index is an effective hedge in a market where other products such as leveraged tokens do not always live up to expectations, it also demonstrates that capital preservation should not only result from individual risk management measures.
Therefore, just as the VIX helps market participants bet for or against the volatility of the S&P 500, the CVI apparently does the same.
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