Bitcoin’s volatility has made it a popular choice among many ambitious traders looking to capitalize upon its price swings, as evidenced by the proliferation of dozens of crypto exchanges.
For some, the more volatility the better. Others would sleep better at night if they could find a way of hedging. Long-term investors and those gaining direct or indirect exposure often fall into the second camp.
Bitcoin derivatives are naturally the next step for some investors. Indeed, the past few months have witnessed some surprisingly strong progress in this area. Tera Exchange’s Bitcoin derivative platform was approved by the US Commodity Futures Trading Commission (CFTC), and IG Group’s Nadex plans to offer bitcoin-based binary options to US clients, subject to CFTC approval.
The inherent volatility and ongoing development of derivative products make the industry ripe for some equivalent of a VIX index. The VIX is a popular metric tracking the implied volatility of S&P index options. It helps traders gauge the current state of volatility. Derivative products built on the index can be employed to hedge against exposure to increased volatility.
Digital Currency Labs (DCL), in conjunction with Emercor, has been working on such an index specifically for digital currency markets. Set to launch in January, “The xBVIX® will function as a key measure of market expectations of near-term volatility calculated using real-time global Bitcoin prices from multiple exchanges,” according to a press release.
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Speaking to DC Magnates, DCL CEO Ron Quaranta described how increasing traction with the CFTC and the maturing industry will increase his index’s appeal:
“CFTC approval for bitcoin derivatives will be a key component for the expansion of BTC trading in the financial markets, and would be another tool in the arms of financial professionals, along with volatility measures. That said, a volatility index will have a series of other use cases in the marketplace that are not predicated on the existence of CFTC sanctioned BTC derivatives. From discussions with clients and market participants, we are confident in the xBVIX uptake.”
Emercor’s experience in index calculation and data sourcing was key to developing a patented metric.
Quaranta plans on aggregating price quotes from the five-to-ten-most liquid exchanges. He added that he is in active discussions with a number of industry players on both publishing the index and building derivative products based on it.
There are also plans to eventually monetize the index, with pricing envisioned to reflect its added value for investors. Early adopters would receive preferential rates.
As to whether other digital currencies such as Litecoin and Dogecoin will be supported, Quaranta said he is quite open if there is a market demand.