Luis Martim Aureliano is an independent financial crypto analyst, consultant.
In its infancy, the crypto market was very directionally one-sided. You could speculate on the market’s upside appreciation, but capitalizing on the downside was limited. Until the introduction of accompanying derivatives like futures and options that are more zero-sum in nature, hedging positions or betting against the market was challenging.
Now, within this expanded universe of derivatives and synthetic instruments, these strategies are not only possible but readily practiced. Even leveraged margin trading is available from many established exchanges. Yet, the crypto market’s qualities have exposed some weaknesses in the exotic instruments designed to capture directional movement upwards and downwards.
The latest downturn in prices underscored this point after Binance’s leveraged DOWN tokens didn’t perform as expected during the crash in prices, causing outrage amongst users. The tokens, which are expected to benefit from price declines, did the opposite in some cases. Despite disclosing the risks, the exchange was quick to note that the tokens’ rebalancing mechanism worked as designed, despite the resulting investor losses in these products.
Fortunately, some products did show that they can deliver as advertised, and among them is COTI’s Crypto Volatility Index (CVI). COTI’s CVI index fills a previously unmet need in one of the most explosive and unpredictable markets: the opportunity to capitalize on the market’s sky-high volatility.
The VIX Reimagined For Crypto
Professor Dan Galai, one of the pioneers behind the Chicago Board Options Exchange’s (CBOE) Volatility Index (VIX), has conveyed his ample experience to the crypto arena through the novel application of the same underlying principles. As a researcher and advisory board member on COTI’s team, Galai shares his expertise in risk management and other areas to ensure a functional product.
Since the CVI mainnet launch, the results have reflected the team’s competencies, with a recent downturn in prices serving as a testament to its success. In the mid-May downturn in major cryptos and subsequent selloff on May 22nd, CVI performed as expected, climbing to record heights as volatility surged.
Apart from proving that the CVI index is an effective hedge in a market where other products like leveraged tokens don’t always live up to expectations, it also demonstrates that capital preservation doesn’t only have to result from individual risk management measures.
Therefore, like the VIX helps market participants bet for or against volatility in the S&P 500, CVI seemingly accomplishes the same.