Volatility as a Crypto Investment Guide

Crypto traders make money when prices change. When prices are extremely volatile there is more potential profit in the markets but also more risk. While crypto traders are attracted by greater volatility, more stability in a crypto price tends to attract longer term investors. Such is the case today as Ether implied volatility has fallen in comparison to implied volatility of Bitcoin. Implied volatility of Bitcoin and Ether are measured by the BitVol and EthVol indexes respectively. Both of these measures of implied volatility work in a fashion similar to the VIX, which provides the same information in the stock market. What does this have to do with volatility as a crypto investment guide?

What Is Implied Volatility?

Implied volatility refers to any measure that puts a number on the likelihood of future market price changes. This is as opposed to historical volatility which looks back at the prior market activity. In the stock market, the Chicago Board Options Exchange’s CBOE Volatility Index (VIX) is an important predictor of market volatility for the following month. Its calculation is based on call and put options for the coming month. A call option gives the buyer the right to buy a stock at a set price even when the market price rises. A put gives the buyer the right to sell a stock at a set price even when the market price falls. The degree of upcoming volatility is implied by the relative numbers of calls and puts which are bets on likely market price movements in the coming month.

Ether and Bitcoin Implied Volatility

We have written previously about Bitcoin futures options. The CBOE offers futures trading for both Bitcoin and Ether. And it offers options trading on those same futures. The BitVol and EthVol indexes are patterned after the VIX. Their calculations are based on calls and puts on Bitcoin and Ether futures for the coming month. In theory, a rise in either the BitVol or EthVol does not predict whether prices are going to be going up or down. Rather that they are simply going to be more volatile. As a practical matter, like with the VIX, these indexes tend to go up when the market is likely to fall and down when the market is tranquil.

Ether Implied Volatility Falls Below That of Bitcoin

As the EthVol index falls below the BitVol index, the shift in crypto volatility has given Ether a leg up on Bitcoin when it comes to institutional investors putting money into the Ether token instead of Bitcoin. This is because these investors will need to spend less to manage their exposure to Ether and buy protection in terms of futures and options. The changes in relative implied volatility of the two tokens appear to be related, to a degree, to the success of Ether staking efforts.

Longer Term Bitcoin Versus Ether Volatility

The volatility indexes for Bitcoin and Ether let us see what the options market thinks about the coming month. It does not necessarily tell us as much about the longer term. We have long believed that over the longer term Ether will benefit from Ethereum’s strong presence in DeFi. However, this presence may also bring with it more regulatory risk in the EU and US as well as in other markets in the coming years. This risk could lead to more volatility of the Ether token and temper the success of Ether that will come from its technological advantages over Bitcoin.

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