trading

LedgerX rolls out LXVX, a volatility index for bitcoin

LedgerX, the cryptocurrency firm behind one of the derivative markets for bitcoin in the U.S., announced a new index to track bitcoin’s wild price swings, CEO Paul Chou told The Block in an interview. 

The so-called LedgerX Volatility Index (LXVX) will provide a gauge for investors in the spine-tingling bitcoin markets to inform their trading decisions. The index will draw its data from LedgerX’s option marketplace, Chou said in an interview. 

“A volatility index for bitcoin was part of the original business plan going back as long as five years ago,” he said over the phone. “Once we got a market we were comfortable with we decided to launch.”

Chou said the index will show how much bitcoin can move to the upside or downside over the next month, which shows the degree to which a trader could lose or gain money on their crypto bet. That could be useful for current crypto investors as well as institutional firms looking to enter the market. “A lot of us used to work at Goldman Sachs and we would use these types of indexes to understand how risky our books were,” he said. 

Despite recent turmoil in U.S. equity markets, Chou says the index indicates bitcoin is three times as volatile as stocks.

“I think those large, extreme drops followed by staircase moves up will moderate overtime,” Chou said. Still, bitcoin’s current volatility might be keeping larger asset managers from putting money into the market. 

As for LedgerX, the firm will not be charging for firms or individuals to use the new index. Still, the firm might build out other products tied to the index, such as new derivatives. “We could roll out a VIX product for bitcoin that could be the first of many tradable products tied to the crypto’s price swings,” he said. 

In the stock market, traders can trade VIX options and VIX futures, which allow investors to bet on volatility. There are also ETF products tied to the VIX. Notably, the SEC and CFTC conducted “a review” of those products after a volatility spike last February resulted in billions of dollars lost for investors, as reported by Bloomberg
 
Editor’s note: A previous version of this article incorrectly spelt Paul Chou’s name.