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Key Takeaways:
Risk management tools: Volatility futures provide traders and investors with new instruments to hedge against or speculate on the price movements of Bitcoin and Ether. By offering futures contracts tied to the volatility of these cryptocurrencies, Bitfinex is enabling market participants to manage their exposure to the inherent price fluctuations in the crypto market.
Market maturity and innovation: Introducing volatility futures signals a growing maturity and sophistication in the cryptocurrency derivatives market. Bitfinex’s initiative to launch these futures contracts demonstrates its commitment to innovation and staying ahead in the rapidly evolving crypto trading landscape.
Expanded trading opportunities: With the addition of volatility futures, traders can now access a broader range of trading strategies. These futures contracts can appeal to speculative traders seeking to capitalise on volatility fluctuations and institutional investors looking for risk management tools.
Bitfinex, one of the leading cryptocurrency exchanges, has made a significant stride in the derivatives market by introducing volatility futures contracts for Bitcoin (BTC) and Ethereum (ETH).
Overview
On April 3 2024, Bitfinex announced that it had launched trading in two new perpetual futures contracts. Bitfinex derivatives platform Bitfinex Derivatives provided by iFinex Financial revealed that the new contracts are based on the Volume Implied Volatility indexes, the BTC Implied Volatility Index (BVIV) and ETH Implied Volatility Index (EVIV).
Bitfinex’s head of derivatives, Jag Kooner, said, “The creation of these indices allows our customers not only to monitor but trade the implied volatility of Bitcoin and Ether in a simple perpetual format.”
Kooner highlighted that perpetual futures make the most tradable format in the crypto space, as other contracts rely on a dated structure.
Perpetual futures are known as perpetual swaps or perpetuals, which are derivative contracts that enable traders to speculate on the future price of an asset without an expiration date.
He added, “Tracking the 30-day implied volatility in Bitcoin and Ether options contracts without the need to roll — I.e. dated futures —opens up the product to retail and institutional investors alike.” This new offering aims to provide traders with a unique instrument to hedge against or speculate on the price fluctuations of these two significant cryptocurrencies. Volatility futures have gained attention in traditional financial markets because they offer exposure to volatility as an asset class. With Bitfinex’s entry into this arena, the crypto ecosystem is witnessing further maturation and diversification of financial products.
Understanding Volatility Futures
Volatility futures are financial contracts where traders can deliberate on the future volatility of an underlying asset rather than its price movement. Unlike traditional futures contracts that focus on the price of an asset at a particular future date, volatility futures allow traders to bet on the expected level of volatility within a given time frame. This presents a unique opportunity for market participants to hedge against or capitalise on uncertainty inherent in crypto markets due to their high volatility. Bitfinex’s volatility futures for BTC and ETH are designed to track the expected volatility of these cryptocurrencies over a predetermined period.
Bitfinex’s new contracts will join over 60 perpetual futures contracts available for cryptocurrencies and commodities such as precious metals and oil, FX, and equities. Kooner suggested that the new contracts will allow them to add implied volatility as another asset class. Traders can take long or short positions on these futures contracts based on their views on the future volatility of BTC and ETH. By trading volatility futures, investors can profit from changes in the level of volatility, irrespective of whether the underlying asset’s price goes up or down. According to the new contracts, asset price movement will be muted, and then volatility contracts.
Kooner noted, “With many crypto prices reaching new ATHs, the likelihood of increased volatility and significant drawdowns means there is more utility for these indexes than ever.”
Implications for the Cryptocurrency Market
The introduction of volatility futures on Bitfinex carries several implications for the broader crypto market:
Risk management
Volatility futures provide traders with additional tools for risk management. Investors can hedge their exposure to BTC and ETH by taking positions in volatility futures, thereby mitigating the impact of price fluctuations. This could attract institutional investors and sophisticated traders seeking to manage risk in the volatile crypto market.
Market efficiency
The availability of volatility futures could increase market efficiency by providing more accurate pricing signals for volatility expectations. As more participants trade these futures contracts, the market may become more liquid and better reflect the accurate risk perceptions of investors. This could reduce volatility in the spot markets for BTC and ETH over time.
Derivatives market growth
Bitfinex’s foray into volatility futures expands the range of derivatives products in the crypto ecosystem. This diversification could attract a broader audience of traders, including those specialising in derivatives trading. It also paves the way for developing more sophisticated financial instruments tailored to the needs of crypto investors.