Volatility Trading — Short Guide: How To Take Profit During Rapid Periods Of Crypto Volatility
Volatility is a factor constantly embedded in the minds of both retail and institutional crypto investors. We have seen the crypto marketcap shed almost 25% of its value in the span of a few short days, before posting some recoveries (at the time of writing this). This is not the first time we have experienced market movements like these and it will certainly not be the last. Against this backdrop, the Crypto Volatility Index (CVI) was created to provide a mechanism for crypto investors to access the market’s sentiment on future volatility. Given the huge correlation between the CVI and BTC & ETH option prices, retail and institutional investors alike are now equipped with an index that reflects when the markets are either more or less volatile.
Looking through the past few days of mid-January 2022; the CVI was trending lower at the start of the January 17th week, with a 14-month low of 64. Just four days later, however, the market sentiment for risk reached a 1-month peak at 90 (a 40% increase in risk sentiment in the span of just a few days).
Observing these values, one can only ask the following questions:
- Given the widespread adoption of crypto across various economies, will volatility still remain a constant theme in the future?
- Are there any strategies that will enable investors (retail and institutions alike) to profit from these short-term volatility spikes?
The answer to both questions is; Yes.
We will be publishing thought pieces with our opinions on crypto volatility in the coming months — however, in this piece, we will expand on some of the strategies investors can use to potentially take profit during rapid periods of crypto volatility. Through volatility trading, which involves generating profit from the short-mid-term swings in the direction of perceived volatility, as measured through platforms like the CVI.
Example: January 20–24th, 2022 Market Swings
In our last Volatility Times, we mentioned the CVI reached a 14-month low of 65. Despite the ongoing geopolitical and economic fears, the market’s perception of volatility seemed to be much tempered. This sentiment seemed to have been short-lived; a few days after the article was published, the CVI shot up by almost 40% to 90. Short-term profit takers were able to capture some of this upswing by taking a long position on the CVI.
Market participants could have captured upwards of 40% in short-term profit with just a few steps that include:
- Visit the CVI platform at www.cvi.finance/platform
- Connect your wallet to the platform
3. Choose between your currency of choice ( USDC & ETH)
4. The CVI also provides a Leverage option for market participants that choose to utilize additional capital to their strategy. Through this, users are able to borrow additional capital from the pool to maximize their potential profits.
5. Place a BUY order at the entry point of 65, and later sell this position at 85. This would have led to a 40% profit in just 4 days (the value is even more if leverage was utilized).
Overall, this is a plain-vanilla method of trading risk on the CVI. There are other strategies like Volatility Tokens, Shorting, and lots more that will be covered in the coming weeks. We hope this sheds some light on a simple method that traders can use to trade volatility.