The Bitcoin VIX and Its Variance Risk Premium

Abstract

The authors acquire a unique dataset of high-frequency traded prices for bitcoin call and put options from the Deribit cryptocurrency derivatives exchange, by 15-minute sampling via the application programming interface. They use these prices to construct a term structure of bitcoin implied volatility indices using a variance swap fair-value formula that is employed by the CBOE for the VIX, an index commonly referred to as the “investor fear gauge” for the US stock market. Employing over seven million option prices, they construct the bitcoin implied volatility indices with maturities from one week to three months, sampled every 15 minutes from March 2019 to March 2020. They discuss the features of the index and the associated bitcoin variance risk premia, with three different regular time partitions for realized variance, viz. 15-minutes, hourly, and daily. They also examine the relationship between bitcoin’s 30-day realized variance, volatility index, and variance risk premium, with their equivalent for US equities, oil, gold, the USD/EUR exchange rate, and the 10-year US Treasury note. <b>TOPICS:</b>Currency, mutual funds/passive investing/indexing, statistical methods, performance measurement <b>Key Findings</b> • The authors’ novel dataset of bitcoin option prices from Deribit is applied to quote bitcoin VIX indices with maturities from one-week to three months. The short-maturity bitcoin VIX exceeded 200% after the global outbreak of Covid-19. • The indices provide indicative fair values for bitcoin variance swaps, which are traded on-chain. Using realized volatility monitored at 15-minute, hourly, and daily frequencies, they examine the bitcoin variance risk premium at different maturities. • Bitcoin’s 30-day realized volatility, volatility index, and variance risk premium are correlated with their equivalent for US equities, oil, gold, the USD/EUR exchange rate, and the 10-year US Treasury note. Diversification potential decreased dramatically after the outbreak of Covid-19.