Market Volatility: Why Is Crypto So Volatile?

One can clearly see the two main clusters of observations for CVX, i.e., a pre-COVID-19 regime around 50–60 and post-regime around 75–85. Volatility is a prominent characteristic of the cryptocurrency market that — for now — does not appear to be ending soon. Instead of fearing volatility, understanding its causes and implications can help individuals make more informed decisions and potentially capitalise on the opportunities it presents. Take a look at our free monthly Alpha Navigator report for metrics like volatility, macroeconomic commentary, and more to get a picture of where the crypto market might be headed.

Volatility can create opportunities for traders, as it makes it so there are more instances where they can potentially profit from buying and selling assets. Risk can take many different forms, but generally, assets that have greater volatility are perceived as being riskier because they have sharper price fluctuations. An asset’s beta measures how volatile that asset is in relation to the broader market. If you wanted to measure the beta of a particular stock, for example, you could compare its fluctuations to those of the benchmark S&P 500.

Selection of option contracts and aggregation

Therefore, to access additional liquid nodes in the term structure, all expiries between 2 and 60 days from each timestamp are included. One reason for this expansion is due to the large gains that cryptocurrencies (especially Bitcoin) can bring to investors, thanks to dramatic fluctuations in prices [12]. Furthermore, unlike the stock market, the cryptocurrency market has much fewer restrictions, allowing investors to complete a transaction quickly and freely [38]. Unfortunately, the ease of trading in cryptocurrency What Is Customer Relationship Management makes it very vulnerable to external factors such as news of financial developments, the movement of other assets and even the statements from influencers [17, 29]. As a consequence, compared to traditional markets such as stocks, bonds and commodities, the volatility of the cryptocurrency market tends to be extremely high [39]. This can lead to large fluctuations, for instance, a study conducted by Alexander et al. revealed that the losses of cryptocurrencies can reach 70% within one day [9].

We may, but are not obligated to, update any outdated, incomplete, or inaccurate information. Along with that comes the implementation of leveraged volatility tokens (ETHVOL-X2 and ETHVOL-X3) which will be supported within the same available liquidity pools and tradable in different DEX environments. In order to avoid high gas fees from using the platform on the Ethereum blockchain, the team has managed to release a contract optimization model to cut down gas costs by about 40%.

Crypto Trading Analysis for Predicting and Managing Volatility

Volatility is an important metric and the most common risk measure in finance. Accessing stable and reliable volatility information is of fundamental interest to investors and risk managers alike. However, implied volatility must be based on a broad spectrum of liquid and reliable option prices, and hence, requires a much larger data foundation than realized volatility.

However, the currently relatively large and varying number of strikes and expiries entering the index increases complexity and, thus, makes it harder to physically replicate the index. That being said, decreasing the number of assets by focusing on fewer nodes would increase concentration risk and make the index more susceptible to manipulation. Considering that the young cryptocurrencies derivative market cannot provide the liquidity that is available on mature markets, we decided in favour of diversification over a larger number of strikes and expiries. This assessment might be updated once the liquidity situation for cryptocurrency derivatives improves. Our aim is to predict one-day future CVI index using 10 input features, which are 10 cryptocurrency time series.

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The disconnection from the dynamics of traditional markets supports claims on the potential for portfolio diversification made by, e.g., Baur et al. (2015), Bouri et al. (2017a, 2017b) and Dyhrberg (2016). Both CVX and VCRIX measure cryptocurrency volatility, but use fundamentally different index methodologies, hence, the low correlations. Compared to classical asset volatilities, cryptocurrency volatility dynamics are often disconnected, yet, share common shocks. The results are also similar to the paper on realized volatility from Conrad et al. (2018), where the authors find that equity volatility has a delayed spill-over effect on cryptocurrency volatility. We believe that CVI provides the most reliable DeFi tool suitable for analyzing volatility, hedging portfolios and earning from being a liquidity provider. Since the invention of Bitcoin, cryptocurrencies have evolved into a new class of financial assets.

• For a longer period from 2010 to 2020, GARCH and a simpler corresponding model ARCH have also been successfully used to form variance equations for highly-capitalized cryptocurrencies [5].
• Risk can take many different forms, but generally, assets that have greater volatility are perceived as being riskier because they have sharper price fluctuations.
• To begin with, legacy corporations are already recognizing various very real blockchain use cases in their industries.
• These tokens can be understood as being a wrapper for opening a long position on CVI and are tradable on Ethereum compatible DEXs.
• If we assume the cryptocurrency industry will continue to grow more diversified, crypto volatility could diverge further from Bitcoin volatility.
• What’s more, our blog is updated with free, in-depth articles like this one on a daily basis.

We explore the volatility of crypto markets compared to that of traditional financial markets. For the purpose of this paper, we follow the liquidity and focus an Deribit and data therefrom. However, market mechanics and contract specifications are similar across all major crypto derivative exchanges. Table 1 provides exemplary option contract specifications from Deribit, CME, and CBOE. Exchange mechanics are also roughly identical; in particular, every exchange that offers derivatives also provides a clearing service that requires an extensive infrastructure on top of the matching engine. Options—like other financial derivatives—are tied to their underlying by an arbitrage relationship, which is based on the replication of the options’s cash-flow.

The cryptocurrency volatility index (CVX)

The latter recently saw its highest levels since inception in 2008, which was primarily driven by the 2020 oil price war between Russia and Saudia Arabia and is therefore of no further interest to this study. Market liquidity in our sense is the readiness of participants to exchange the underlying asset and its derivatives. The latter relies on replication, e.g., the replication of an option payout trough dynamic hedging in the underlying.

It is important to note that put and call options are basically wagers, or bets, on what the market will do. Volmex Labs, the leader in crypto volatility indices and volatility products, announced the launch of the Volmex Perpetual Futures public testnet on… Table 2 shows the results of our proposed model and four other models used for comparison. AT-LSTM-MLP, which is our model, outperforms other methods with RMSE, MAE, and SMAPE of \(2.24 \pm 0.17\), \(1.62 \pm 0.09\), \(1.76 \pm 0.10\), respectively.

LSTM–GARCH Hybrid Model for the Prediction of Volatility in Cryptocurrency Portfolios

S&P 500 and Euro Stoxx 50, for instance, are two large indices that track North American or European stocks respectively. These price or return indices are complimented by risk benchmarks, most famously CBOE’s Volatility Index (VIX), colloquially dubbed the ‘fear index’, which is designed to capture expected volatility. The CVI is created by computing a decentralized volatility index from cryptocurrency option prices together with analyzing the market’s expectation of future volatility. Traders are able to use the index as a tool to either speculate or hedge on their portfolio if they think the volatility in crypto is going to increase. The VIX Index is oftentimes said to describe the stock market’s current uncertainty, risk, and ”fear”. Consequently, there are also indexes trying to track not only specific Bitcoin volatility, but also overall crypto volatility.

For a multi-dimensional interpolation (volatility surface), this case becomes even more unlikely. 1For an introduction to Cryptocurrencies, i.e., digital assets that use a distributed ledger or blockchain technology, we refer to Härdle et al. (2019). Where Δ is the first difference operator, ut is i.i.d., and ϵt-1 can be interpreted as the equilibrium error in the previous period. Both α and γ capture short-term dynamics; however, the actual equilibrium error adjustment is captured by parameter α. In this model specification, a negative α implies that the CVX76 moves back towards CVX, until the equilibrium relationship is re-established.

8Furthermore, this multivariate interpolation method allows us to interpolate on the volatility surface, i.e., to interpolate between different strikes and expiries. We tested different possible values for the number of Decision Trees and found that 100 gives the best result. At each internal node of a Decision tree, we randomly choose three input features to consider when looking for the best split.

Cryptocurrency volatility markets

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