Crypto Volatility Index (CVI): Measuring Expected Volatility in Crypto Markets

What Is the Crypto Volatility Index?

The crypto volatility index was built by COTI with input from Dan Galai (one of the people behind the original Cboe volatility index). It tracks the 30-day implied volatility of Bitcoin and Ethereum, worked out of their options prices with the Black-Scholes model and published on a scale of 0 to 200, higher meaning bigger swings expected.

Implied volatility is the volatility figure baked into what traders pay for options. Options cost more when bigger moves are expected, either way, so working backward from the price gives the expected volatility the market has priced in, which makes CVI a crypto market volatility index built on expectations and not on what already happened.

Being decentralised, the index is published on-chain for other protocols to build on, which is partly why it shares a name with tokens trading on exchanges. It isn't a token price, though, and the name causes a fair bit of muddle on that front, as comes up further down.

How CVI Differs from Historical Volatility

Historical volatility, called realised volatility too, measures how much price actually moved over a past window, out of daily returns usually. CVI looks the other way, forward, being implied volatility, the size of move options are pricing for the coming month.

The two differ often enough. Expected swings can come in bigger than what then happens, or smaller, and options traders watch that gap closely for that very reason. A high CVI followed by a quiet month isn't the index broken, it's an expectation that didn't pan out, is all.

Rough way to read an annualised implied volatility figure: divide by the square root of 365, about 19.1, since crypto trades seven days a week. An annualised 60% then comes out near a 3.1% one-day move, one standard deviation, up or down, and that's a sense of scale, not a forecast of anything.

CVI vs VIX

The VIX does for the S&P 500 roughly what CVI tries doing for crypto, both turning options prices into a 30-day expected volatility number. That's more or less where the likeness stops being exact, though.

• Underlying: S&P 500 index options for the VIX, Bitcoin and Ethereum options for CVI.

• Method. The VIX uses Cboe's own model-free formula across a strip of options, while CVI's published method rests on Black-Scholes.

• Scale? Crypto moves a lot more, so CVI readings tend to sit well above VIX readings, and a number on one says nothing about the other.

• Venue: the VIX comes from a regulated exchange, whereas CVI gets published on-chain through Chainlink oracles.

Calling either one a fear index is a nickname and not a definition. Both measure expected fluctuation, fear being only one of the things that can push that up.

What Rising and Falling CVI Mean

A rising CVI means the market expects more crypto market volatility than it did, a falling one that it expects less. Neither of them says which way, and CVI can climb in a rally as easily as in a sell-off.

Laid against a price chart, the hypothetical cases look something like this:

• Price rising, CVI rising: a fast breakout where options get bid up, for chasing the move and for protection against it reversing both.

• Price falling, CVI rising. A sell-off with bigger swings expected from here, in either direction.

• Price range-bound, CVI falling: expectations compressing, a quiet range that may or may not end soon.

• Price flat while CVI rises? Often a scheduled event getting priced in before anything moves on the chart at all.

Speed counts for something as well. A CVI that jumps in one session says more than one drifting up a few points across a month, and a reading falling while price grinds sideways is, oftener than not, just a market getting bored. Tendencies to check, all of those, not rules to trade on.

CVI vs Crypto Fear and Greed

The Crypto Fear and Greed Index, the best known one published by Alternative.me, is a sentiment score from 0 to 100, built from inputs like volatility, momentum and volume, social media and search trends. It gets refreshed once a day. CVI by comparison comes from options prices only, and what it describes is the size of moves expected, not the mood behind them.

They can disagree, and that tells something in its own way, extreme greed alongside a calm CVI being a confident market not paying up for protection. Sentiment stays the side dish here though, expected volatility being the main course.

How to Check the Current Crypto Volatility Index

People looking for crypto volatility index CVI current value usually want one simple number. But that number would be stale by tomorrow, mind you. So here's how to check it by yourself instead:

1. Go to the publisher, the CVI site run by the project, rather than trusting a crypto volatility index CVI current figure reposted somewhere without a source.

2. Find the timestamp. A crypto volatility index current reading with no date and time on it is of little use, and if it hasn't updated in days, treat it as stale.

3. Check what's being measured, because the name gets reused and some sites put a CVI label on a realised volatility measure.

4. Don't confuse it with a token price. Price trackers list GOVI, CVI's governance token, under the name CVI, priced in cents or less, and that has nothing to do with the index reading.

5. Stale data? Deribit's DVOL indices give Bitcoin and Ethereum implied volatility instead, on their own scaling.

When two sites show different numbers for the same hour, a different method or a token price mixed in is nearly always why. With that done the current CVI value is something to set next to a price chart, and this guide on how to analyse Bitcoin price moves covers the chart side of it.

Practising CVI Analysis on a Pocket Option Demo Account

CVI isn't on Pocket Option charts, it's outside context, so the exercise runs on two screens, the index in one tab and a crypto chart on the demo account in the other. Line the clocks up first, since the index's timestamps and the chart's time need to agree, and this guide on how to change the time zone in Pocket Option shows where that setting sits.

1. Check the asset list for a live-market crypto pair such as BTC/USD, the one without the OTC label, and that it's offered in your region.

2. Once a day, note the current CVI value with its timestamp, alongside the price.

3. Mark each day on the chart as rising, falling or range-bound.

4. After a week, compare each day's actual range with what the expected volatility implied.

5. Demo trades? Only with rules written down beforehand, and the CVI reading noted next to each.

A hypothetical day, to show the check: a reading equivalent to an annualised 60% points to roughly a 3.1% one-standard-deviation move. If Bitcoin then trades a 1% range three days running, expectations ran well ahead of reality, and if it swings 6% in an afternoon, reality outran them, simple as that.

Two to four weeks of that gives a feel for how expectations and outcomes line up, and how often they don't. The demo account comes with a $50,000 virtual balance and needs no deposit, so the only cost of it is time.

Limitations of CVI as Trading Context

• It covers Bitcoin and Ethereum options only, not the altcoin market at large.

• Direction? It says nothing about it.

• Options markets misjudge, and expected volatility ends up above or below what follows a good deal of the time.

• One number blends Bitcoin and Ethereum, so one of the two can be calm while the other isn't, and the reading won't show which.

• Data can go stale, and similarly named indices measure different things.

So it's context for position size and stop distance, treated as such, not a signal. Wider expected swings argue for smaller positions, a point this guide on crypto risk management develops properly, and losses happen in calm markets and wild ones alike.

Conclusion

The crypto volatility index measures how big the options market expects BTC and ETH swings to be over the next month. The direction is not implied though, and nothing is guaranteed. Check the source for the CVI and timestamp before using it. Also it can be wise to compare it against realised volatility, rather than trusting it blindly. Higher readings are often optimally used to adjust the position sizing, and not for choosing trade direction, let alone a point of entry.

Disclaimer: This article is for informational purpose and does not constitute investment or trading advice. Remember that trading involves a real risk of capital loss.