Bitcoin’s usefulness as a store of value investment or transactional currency continues to be hotly debated. The issue essentially boils down to just a handful of issues. These include scalability, transaction speed, and adoption.
Most crypto devotees consider the coin to be best used as a payment system. For investors, and some cryptophiles, the coin is best used as a store of value. However, no matter the use case, the relative stability of price is critical for greater trust and adoption.
Volatility is Key
Differences aside, the issue of volatility in a trading space is a universally understood benchmark. Any asset that changes hands through trade is subject to market volatility. This helps to indicate potential risks to investors, and at times, produces fear and uncertainty in the market.
Legacy traders have long measured volatility to determine market stability. For example, the Chicago Board Options Exchange (CBOE) Volatility Index (VIX) is used by stock market traders to measure volatility. The VIX was created to statistically measure degrees of variation in trading price over time of a specific stock.
In other words, it indicates price fluctuations over time. Of course, the greater the fluctuation and the less time the stock was observed, the higher the volatility of that particular stock.
The VIX is used to measure volatility in two main ways. The first method uses historical price data. This produces a guess on the future based entirely on solid past prices. The index also assesses implied volatility on the S&P 500 index options. The CBOE VIX is the first index to use real-time, live price SPX options to calculate expected volatility.
Bitcoin Follows Suit
The latest Bitcoin index to launch has been created by LedgerX, the first federally regulated exchange and clearinghouse in the institutional market for Bitcoin swaps and options. They are calling it the LedgerX Volatility Index (LXVX).
— LedgerX (@ledgerx) January 14, 2019
The VIX has long been referred to as the stock market fear index, as it represents the amount of risk associated with a particular investment. Following in the footsteps of the VIX, the new index is calling itself the ‘Bitcoin fear index.’ The fear index concept can be used to indicate the overall risk of an entire sector of the market, providing investors with reasonable ways to determine when to enter or exit, as well as the potential for loss or gain.
Volatile, but Stabilizing
For example, comparing LXVX measure of Bitcoin price volatility to stock market volatility as measured by the VIX finds that, as a whole, bitcoin is approximately three times more volatile than traditional stocks. This would indicate that there are greater levels of fear in the market, and the potential for substantial swings is greater.
However, the LXVX is also down about 20 percent since Dec 2018. This could mean a decrease in the fear and uncertainty surrounding Bitcoin compared to just a month ago. Other market indicators, such as trading volume, realized value, and overall market stability, paint a similar forecast.
Taken together, the data from the LXVX indicates that the overall Bitcoin market has begun to regain the stability that it has needed. Particularly for those investors and traders who are used to legacy platforms, adoption of Bitcoin as a genuinely tradable asset requires a level of stability that is commensurate with the overall market.
As Bitcoin continues to find its footing after the brutal bear market of 2018, hodlers should expect to see increasing involvement from institutional sources, as well as private traders looking to enter at the bottom.
Do you think the LXVX is signaling that the market has reached a bottom? Will volatility continue to drive prices down? Let us know your thoughts in the comments below!