The CFTC-regulated crypto asset management platform LedgerX has built an index that tracks Bitcoin’s price volatility. The LedgerX Volatility Index (LXVX) will provide cryptocurrency traders with insights into Bitcoin’s expected volatility, and is alternatively known as a “Bitcoin fear index.”
The firm will use data drawn from their regulated Bitcoin options contracts, in which various financial institutions have been trading over the past year.
— LedgerX (@ledgerx) January 14, 2019
What Is a Volatility Index?
According to Juthica Chou, LedgerX’s president and chief risk officer, the LXVX can be compared to the CBOE Volatility Index (VIX), which is a popular measure for tracking expected volatility in the stock market.
The difference between the 2 indexes is that the LXVX solely tracks expected Bitcoin volatility, while the VIX tracks the expected volatility of the entire stock market.
As reported by Coindesk, Chou explains a volatility index as a metric that:
“tells you the expected certainty that the market is forecasting … That’s what it tells you with respect to any market.”
She then added that the LXVX can be described as a Bitcoin fear index, just as the VIX is referred to as a stock market fear index.
Chou previously worked as a volatility trader at Goldman Sachs, and she stated that the VIX was an important benchmark in her line of work. This was what inspired Chou and LedgerX to build one for Bitcoin, so that traders and investors would have a reliable Bitcoin fear index to better monitor risk and manage their businesses.
In an effort to explain how useful the LXVX can be, Chou provided Coindesk with an example of the LXVX tracking Bitcoin’s volatility near the end of 2018 to the beginning of this year:
“If you look basically since the start of the year, the LXVX is down about 20 percent so it’s down to about 68, and… this is still approximately three times the volatility of the stock market but it’s very telling in the bitcoin space because it shows that there is less of the fear and uncertainty than what existed [in] December.”
Unlike the CBOE Volatility Index (VIX) where traders can trade the index via ETFs or ETNs, the LedgerX Volatility Index (LXVX) is not a tradable product. However, LedgerX is open to this idea and plans to build the LXVX as a tradable product in the future.
Prior to LedgerX’s official announcement of the LXVX, their institutional clients have already been able to track the benchmark for at least a few months, and now everyone can track the index via the LedgerX website.
Will you be tracking Bitcoin’s expected volatility via the LedgerX Volatility Index (LXVX)? How accurate do you think this index will be? Let us know what you think in the comment section below.