Calculate the Expected Range of Bitcoin Using LXVX!

LedgerX, Inc., a cryptocurrency options trading platform, announced on January 14 the launch of the world’s first Bitcoin version of the implied volatility index “LXVX.” Although it has only been about a month since the announcement, the market attention is increasing day by day.
In this article, I will clarify the meaning of LXVX and implied volatility, and then I will explain how to calculate the expected range of Bitcoin using LXVX.

What is LXVX?

LXVX stands for “LedgerX Volatility indeX” and represents BTCUSD’s implied volatility over the next 30 days. With more market participants expecting Bitcoin to move (both up and down) in the future, LXVX will have upwards pressure, if less people join and trade Bitcoin in the future. If the number of people is increased, LXVX will have reduced pressure. In other words, LXVX attracts much attention as a mirror that reflects the sentiment of market participants.
Actually, a similar indicator is called “VIX.” It is calculated based on the 30-day implied volatility of the S&P 500, a major US stock index, and has attracted much attention from market participants as the aka “Fear Index.” The LXVX launched by LedgerX can be said to be a Bitcoin version of this VIX.

What is implied volatility?


There are two types of volatility: historical volatility and implied volatility (expected volatility). Historical volatility is an indicator of how much the underlying asset (for example, Bitcoin) has moved in a certain period in the past. In other words, historical volatility is merely an indication of past results.
Implied volatility, on the other hand, is an indicator of how much the underlying asset (for example, Bitcoin) will move in the future. This reflects the expectations and expectations of market participants, so the value of the information is greater than the historical volatility, which represents only past results. In fact, the premium (option fee) for buying and selling options is calculated based on this implied volatility.

How to calculate the expected range of Bitcoin using LXVX?

Use LXVX to estimate the future Bitcoin price range expected by market participants.
First of all, let’s check the current (as of February 19, 2019) numbers of “LXVX”. You can always check the latest numbers on the LedgerX website.

The number written on the top left of the chart is LXVX. In this example, 56.01% is LXVX. However, even if it is stated to be 56.01%, I really don’t have an idea what this means. That’s because the 56.01% figure is “annualized” as the expected rate of change for the market participants’ Bitcoin in the next 30 days.
Perhaps what you want to know is, “this 56.01% means that the price of Bitcoin can move how much in a day?” “It means that in a month it can move in a price range,” but should be a more specific representation such as “how big of a price range can Bitcoin move within 3 months?”
In the following, I would like to explain the three calculation steps to back-calculate the annualized LXVX into a specific price range.

[How to calculate the forecasted price range for the next month]

Calculation step 1
The annualized LXVX is divided by √12 and back-calculated on a monthly basis.
Formula) 56.01% ÷ 12 = 16.17%

Calculation step 2
Multiply the BTCUSD actual price (e.g. $3,900) by 16.17% calculated above.
Formula) $ 3,900 x 16.17% = $ 631

Calculation step 3
Add or subtract the $ 631 calculated above to the BTCUSD’s prevailing price.
Expected range upper limit → $ 3,900 + $ 631 = $ 4,531
Expected range lower limit → $ 3,900-$ 631 $ 3,269
In other words, LXVX at 56.01% would suggest an estimated range of $ 3,269 to $ 4,531 in the next month.

[Calculation of expected price range for the next day]

Calculation step 1
The annualized LXVX is divided by √365 and back-calculated on a daily basis.
Formula) 56.01% ÷ 365 = 2.93%

Calculation step 2
Multiply the BTCUSD actual price (e.g. $ 3,900) by the 2.93% calculated above.
Formula) $ 3900 x 2.93% = $ 114

Calculation step 3
Add or subtract the $ 114 calculated above to the prevailing price of BTCUSD
Expected range limit → $ 3,900 + $ 114 = $ 4,014
Expected range lower limit → $ 3,900-$ 114 = $ 3,786
In other words, LXVX at 56.01% suggests that the expected range for the next day (24 hours) is $ 3,786 ~ $ 4,014.

Summary


In this way, implied volatility such as LXVX is difficult to understand if it remains “annualized,” but it is easier to imagine at once if you reverse it by yourself and replace it with “the actual price range”. In addition, implied volatility incorporates the expectations and sentiments of market participants, so it is very useful as a tool to build market outlook.
By all means, please predict the future of Bitcoin while referring to LXVX!