Enterprise-based fintech platform COTI has rolled out a decentralized crypto market volatility index (cVIX) to help investors assess and quantify risks.
- Launched Tuesday, the cVIX is explicitly designed for the decentralized finance (DeFi) market.
- The index is created by computing a decentralized volatility index from cryptocurrency option prices and utilizes the Ethereum-based oracle network Chainlink as a source for required financial data.
- The cVIX is similar to the stock market's VIX index, which indicates the level of implied volatility, or investors' expectations of how volatile the equities would be over a specific period.
- Such indexes are sometimes referred to as "fear indexes" because they often reflect the market's worries about the underlying asset.
- The index will initially support trades and deposits in ether (ETH) and stablecoin tether (USDT) and add other tokens shortly.
- Traders can hedge themselves against a potential rise in market volatility by taking a long position in the cVIX.
- Similarly, traders positioned for a spike in volatility by employing option strategies such as straddles (a simultaneous long position in both a call and a put with the same strike prices) can hedge against market stagnation or low-volatility period by taking short positions in the CVIX.
- Extreme readings on cVIX could be considered as contrary indicators. In traditional markets, a bull run often ends with record-low readings on VIX indicators.
- "cVIX can be used by liquidity providers who play the role of the insurance company and earn fees in the process. In the event of a trader buying a long or short on cVIX and losing the trade, liquidity providers are the ones to recoup the lost trade," the press release said.