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The stock market’s Volatility Index (INDEXCBOE:VIX) is used to gauge the prospect of future volatility, and an equivalent index is set to do the same for digital assets.
COTI, a finance-on-the-blockchain ecosystem best known for issuing branded stablecoins, is behind the project, which has been named cVIX. A decentralized version of the traditional Volatility Index, cVIX will enable traders to assess the crypto market’s expectation of future volatility and tailor their strategy accordingly. Although designed and launched by the enterprise-grade fintech firm, it will run completely independently of COTI.
What Is a Market Volatility Index?
Launched two decades ago, the Cboe Volatility Index is often referred to as the Market Fear Index, as it calculates and updates the prices of various volatility indexes to measure the mood of the market, as determined by volatility expectations over the forthcoming 30 days.
Back in March, for example, a spike in the VIX illustrated widespread uncertainty and panic stemming from the coronavirus outbreak. Indeed, the VIX surged to its highest level since the 2008-09 financial crisis as Wall Street traders grappled with the implications of enforced shutdowns and economic turmoil.
The VIX also spiked by 10.5% after President Trump tested positive for COVID-19 last week, and it’s worth keeping an eye on as the U.S. election nears over fears of a contested vote: in recent weeks, VIX futures for mid to late November have suggested a higher degree of equity volatility than for futures in October.
Inevitably, the Market Fear Index reflects crises at a company level, too. For example, if a major tech company such as Facebook (NASDAQ:FB) were to suffer a well publicized hack, the index would turn to fear and investors might dump their stock.
An uptick in the VIX is widely seen as a warning sign by investors, who quickly reduce the weight of stocks in their portfolios and seek refuge in so-called safe-haven assets such as gold and treasuries. Until the announcement of cVIX, however, a comparable tool for cryptocurrencies that operated in a decentralized manner simply did not exist.
cVIX: A Volatility Index for Digital Assets
Real-world events, of course, have implications not just for commodities, stocks and indices, but for digital assets such as bitcoin, ether, and ripple. The first fully decentralized index designed specifically for the defi market, cVIX relies upon Chainlink architecture and several oracles to fetch financial data and produce an expression of market sentiment.
With cryptocurrency traders able to make an informed judgment based on perceived levels of fear or panic in the market, they can take steps to immunize themselves against crashes, for example by swapping from a speculative altcoin into a stablecoin like Tether (USDT). COTI is also releasing a decentralized, self-adjusting trading system that provides a permissionless means of entering long or short positions on cVIX.
Speaking of Tether, the platform will start out by supporting trades and deposits in USDT as well as ETH before branching out. It will also move from Ethereum to its own Trustchain in due course.