BitMEX Launches Bitcoin Fear Index
Bitcoin’s volatility has been well document since the currency began trading back in 2010, when it traded for less than a cent. Today, volatility continues, representing a problem for merchants looking to accept it as a payment method and what many cite as a barrier for mainstream adoption.
Day traders on the other hand, drool at any markets where there is wildly fluctuating price. “Selling high and buying low” in a very short time frames allows them to make money on the bitcoin’s daily roller coaster of price, something that is increasingly attractive in today’s harsh markets.
Bitcoin derivatives platform BitMEX has announced a new futures contracts based on their 30-Day Bitcoin Historic Volatility Index (BVOL) to allow traders more ways to profit off bitcoin’s volatility. Using a time-weighted average price from Bitfinex’s USD/BTC rate, the index takes a daily snapshot of market volatility between a 2 hour window. The month’s volatility is annualized and the contract ends on the last Friday of each month. The result is quoted in volatility points based on BVOL and for each one percent of volatility, traders either make or lose 0.001 BTC.
Bitcoin beat the politically attacked Russian ruble as the worst performing currency in 2014. At the end of 2013, bitcoin was trading above $1,000 but closed at the end of 2014 at just above $300. With so much uncertainty about the future of the currency, BitMEX hopes their Futures Contract will allow traders to profit off trading bitcoin’s volatility as an asset.
[blockquote]What we want to capture with this product is just to allow traders to trade volatility, without having to be trading the bitcoin exchange rate. When you are trading volatility you don’t have to have a view as to whether which direction the market is going to go. You just have to have an idea of how much it is going to move,” said CEO of BitMEX, Arthur Hayes during an WCRadio interview. “So that could be an event risk situation or maybe an announcement by an regulator about a certain piece of legislation that could be related to bitcoin. Instead of thinking whether this is going to be an positive or negative effect on the price, why don’t I just trade the volatility. I could then make positive profit, without calling the market[/blockquote]
During WCRadio’s interview with Hayes and BitMEX’s CTO Samuel Reed the hosts, who goes by their usernames Fibbr and BitcoinBravo, asked the BitMEX team about making a BVOL contract shorter than 30 days. The hosts cited that volatility in the bitcoin market can be much calmer month to month, compared to shorter time frames such as a week or hour. Hayes responded by saying they might introduce products with shorter timeframes depending on the markets response to ot BVOL.
A similar response was given by Hayes when asked about increasing leveraged available for BVOL. Many bitcoin traders have a high appetite for risk and the currently available 5x leveraged, is something the hosts considered to be too small. Hayes responded that they will offer greater leveraged as liquidity picks up and they have a better sense of the risk of the contract.