Last weekend saw the cryptosphere reduced to scorched earth. Tokens were drained of value by over 50% across a board of red numbers that included BTC, ETH and just about everything but stablecoins.
Seasoned traders tipped their hats and said, "Welcome to crypto," as panic broke loose and resistance levels crashed through support after support. More people own crypto today than ever before, and a large number of newer traders panic selling when the market headed south probably added more fuel to the volatility that was produced in this last crash. In short, the weekend was a bloodbath.
If you looked at the sea of red and smiled, you’re either a sociopath or someone who had exposure to the CVI, or crypto volatility index, which seemed to be one of the only positions making money during the crash.
Steering Through Crashes on the CVI
If crypto cycles do in fact repeat themselves, then there will be another crash. This latest crash demonstrated that while crypto presents an extremely volatile market, that volatility paired with a position in the CVI creates an opportunity to make gains or at least hedge against losses.
By following parallel technologies from traditional finance, it’s possible to profit when the market takes a downward turn. The CVI is based on the same principles as the Chicago Board Option Exchange’s CBOE Volatility Index (VIX), an index that has consistently seen green when all others see red. Professor Dan Galai also helped to create both indices.
According to Investopedia:
"VIX-linked instruments allow pure volatility exposure and have created a new asset class altogether. Active traders, large institutional investors and hedge fund managers use the VIX-linked securities for portfolio diversification, as historical data demonstrates a strong negative correlation of volatility to the stock market returns – that is, when stock returns go down, volatility rises and vice versa."
How to Use the CVI to Your Advantage
As an index of volatility, like all indexes, CVI cannot be bought directly. Rather, users take a position on what is essentially a futures or options contract, and when market volatility rises, users can exit their position for profit.
As stated on CVI’s website:
"If you expect the CVI index to increase, you should buy it (take a long position). For example, if you bought a CVI position with 10 ETH when the CVI index was 100, which later went up to 150, you would have earned 5 ETH."
Also mentioned in the CVI’s trading guide is a way to take advantage of less volatility as well. For those who expect the CVI to decrease, they can "provide liquidity to the platform. If the CVI index drops, they will earn the fees paid by the traders who have opened CVI positions."
How the CVI Performed in Latest Crash
If you took a position on the CVI before this last crash, you ended up doing pretty well. On May 22, the CVI spiked to a high of 190, which means users who took positions when the index was at 100 just a week earlier saw 90% ROI during a market free fall.
According to the charts, the CVI on May 22 also saw a massive surge at the same time BTC hit a low, which shows a strong correlation for the CVI’s performance against that of the cue ball’s actions in volatile times. This means the CVI can be a powerful tool for hedging against losses in future crashes if investors can get a good position in time.