FAQs for Volatility Tokens

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Disclaimers

  1. Volatility Tokens are over-the-counter (OTC) derivatives. There are currently two Volatility Tokens offered by FTX Australia: BVOL and iBVOL. BVOL and iBVOL tokens are ERC-20 tokens that track the implied percent-based volatility of bitcoin.
  2. FTX Australia is licensed to issue, make a market and deal in derivatives. FTX Australia offers Volatility Tokens to its clients and hedges 100% of client trades with FTX Trading Limited and/or its successors or assigns. 
  3. The following FAQs constitute general information only and do not constitute a recommendation or financial advice. We recommend that you obtain independent advice before trading Volatility Tokens to ensure they are appropriate for your specific objectives, financial situation, needs and circumstances. 
  4. Before trading Volatility Tokens, you should also read FTX Australia’s Terms of Service (the Terms), Product Disclosure Statement (PDS), Financial Services Guide (FSG), Target Market Determination (TMD) and Privacy Policy located here. By trading Volatility Tokens, you agree that you have read, understood and accept the Terms as well as the PDS, FSG, TMD and Privacy Policy.
  5. Details of our trading fees are set out in the PDS.
  6. This FAQ is current as at [10] September 2022. It may become out of date at some point and/or fail to reflect updated policies.
  7. FTX Australia reserves the right to restrict Volatility Tokens trading as it sees fit.
  8. FTX Australia only services clients of FTX Australia. Further information on location restrictions can be found here.

 

What are Volatility Tokens?

There are currently two Volatility Tokens offered by FTX Australia: BVOL and iBVOL. BVOL and iBVOL tokens are ERC-20 tokens that track the implied percent-based volatility of bitcoin. The implied volatility of bitcoin is the market's forecast of the likely movement in bitcoin’s price. BVOL tokens attempt to track the daily returns of being 1x long the implied volatility of bitcoin; iBVOL attempts to track the daily returns of being 1x short the implied volatility of bitcoin.

BVOL and iBVOL tokens are total return swaps (OTC derivatives). You can trade Volatility Tokens similar to the way in which you can trade spot markets. You must close your position by selling it back to FTX Australia. You cannot withdraw Volatility Tokens to a third party digital wallet or close an open position through another exchange or OTC derivative provider. There is no ability to create or redeem Volatility Tokens at this time.

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How do Volatility Tokens work?

Volatility Tokens get their exposure to the implied volatility of bitcoin using FTX MOVE contracts and bitcoin perpetual futures contracts (BTC-PERP contracts). Each Volatility Token has an associated account that holds MOVE contracts and BTC-PERP contracts. BVOL tokens aim to hold 1/6th each of each MOVE contract that has not yet had its strike price determined as of each rebalance. That means 1/6th each of:

  • Tomorrow’s MOVE contract;
  • Next week’s MOVE contract, and the two weeks after that;
  • Next Quarter’s MOVE contract, and the quarter after that; and
  • -1x BTC-PERP contract (Short).

iBVOL, conversely, aims to hold -1/6th each of those MOVE contracts and 1x BTC-PERP contract (Long).

Here is an example:

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Why trade Volatility Tokens?

 BVOL and iBVOL tokens give the holder exposure to the volatility of the price of bitcoin. Sometimes, you might not have an opinion on whether BTC is going to go up or down, but might have an opinion on how much it will move. If you think that the market is going to be more volatile than expectations, you could buy BVOL, if you think it is going to be less volatile than expectations, you could buy iBVOL. Purchasing BVOL tokens means you will profit if bitcoin moves a lot over a given day. Purchasing iBVOL tokens means you will profit if bitcoin is relatively stable. Volatility Tokens also enable you to, for example, hedge against price movements in the underlying instrument (bitcoin).

 

How Do You Buy/Sell Volatility Tokens?

You can trade Volatility Tokens similar to the way in which you can trade spot markets. For instance you can go to the BVOL/USD market and buy or sell back BVOL or iBVOL tokens. You can also buy or sell Volatility Tokens directly from your wallet page using the 'CONVERT' function. If you find a token and click 'CONVERT' on the right hand side of the screen, you'll see a dialog box in which you can convert digital assets in your digital wallet held with FTX Trading Limited into the Volatility Tokens.

You must close your position by selling it back to FTX Australia. You cannot withdraw Volatility Tokens to a third party digital wallet or close an open position through another exchange or OTC derivative provider. There is no ability to create or redeem Volatility Tokens at this time.

 

What are the risks of trading Volatility Tokens?

Volatility Tokens like all OTC derivatives are complex products and the trading of BVOL/iBVOL tokens is high risk. The market price of any BVOL/iBVOL token may not reflect the price of spot markets in bitcoin and may fluctuate significantly in response to the value of bitcoin’s price, supply and demand, and other market factors.

BVOL/iBVOL tokens do not require users to trade on margin. However, they remain subject to certain risks that you should understand before trading BVOL/iBVOL tokens, including but not limited to:

  • Market price variance risk: Holders buy and sell BVOL/iBVOL tokens in the secondary market at market prices, which may be different from the value of bitcoin. The market price for BVOL/iBVOL tokens will fluctuate in response to changes in the value of the BVOL/iBVOL token’s holdings, supply and demand for the BVOL/iBVOL tokens and other market factors.
  • Portfolio turnover risk: BVOL/iBVOL tokens may incur high portfolio turnover to manage the exposure to the underlying instrument. Additionally, active market trading of a BVOL/iBVOL token’s holding may cause more frequent creation or redemption activities that could, in certain circumstances, increase the number of portfolio transactions. High levels of transactions increase transaction costs. Each of these factors could have a negative impact on the performance of BVOL/iBVOL tokens.
  • Interest rates: BVOL/iBVOL tokens take positions in MOVE contracts and BTC-PERP contracts to achieve their desired implied volatility of bitcoin. These MOVE contracts and BTC-PERP contracts might trade at a premium or discount to spot markets in bitcoin as a reflection of prevailing interest rates in cryptocurrency markets. Thus, a BVOL/iBVOL token could outperform or underperform BTC’s spot market returns due to a divergence between the two markets.

Before trading Volatility Tokens, you should also read FTX Australia’s Terms, PDS, TMD, FSG and Privacy Policy located here.

 

How Do Volatility Tokens Rebalance?

Volatility Tokens rebalance every day at 00:02:00 UTC(Coordinated Universal Time). That means that each BVOL token trades on FTX in order to once again reach its target leverage and roll its positions.

Rolling

Volatility Tokens are designed to represent the implied percent-based volatility of the bitcoin price; this is the market-implied guess at how volatile bitcoin will be. Therefore, to ensure the Volatility Token represents the implied volatility of bitcoin, they need to hold entirely MOVE contracts, the strike price of which has not yet been determined. 

Accordingly, every day, BVOL and iBVOL do the following:

  1. a) sell any MOVE contracts that just had their strike price determined;
  2. b) buy newly listed MOVE contracts; and
  3. c) Maintain 1x and -1x BTC-PERP leverage.

So on April 13th at 00:02:00 UTC, BVOL and iBVOL would sell the daily MOVE contract whose price had just been determined and buy tomorrow’s daily MOVE contract. All other positions would remain the same as set out below:

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The above example only involves rolling the daily MOVE contract, but at the beginning of a week or quarter it would involve rolling those as well.

Rebalancing

BVOL targets +1x leverage, and iBVOL targets -1x leverage.

As such, BVOL will not need to significantly alter its leverage at rebalance time: there may have been small amounts of slippage but by and large its leverage should always be 1.

iBVOL, on the other hand, will need to alter its leverage if volatility is down.  If volatility is down, iBVOL will have gains and will reinvest them by selling more MOVE contracts; if volatility is up, iBVOL will have losses and will buy back MOVE contracts to reduce risk and attempt to avoid liquidation.

Because of this BVOL almost completely avoids liquidation risk, but iBVOL is at risk if volatility doubles in a day. To mitigate this, iBVOL also has daily rebalances. If market moves cause iBVOL's leverage to reach -4/3, it will do an intraday rebalance to reduce risk. Specifically:

  • FTX periodically monitors the iBVOL token’s leverage. If iBVOL leverage goes above 4/3 in magnitude, it triggers a rebalance.
  • When a rebalance is triggered, FTX calculates the number of units of the underlying instruments iBVOL needs to buy/sell to return to -1x leverage, marked to prices at that time.
  • FTX then sends orders in the FTX MOVE and BTC-PERP orderbook to rebalance. It sends a maximum of $1m of orders per 10 seconds until it has sent the desired total size. These orders trade against the prevailing bids/offers in the orderbook at the time.
  • Rebalancing may involve slippage and trading fees.

 

How does rebalancing impact Volatility Tokens’ Performance?

Daily Move

Each day (from 00:02:00 UTC to 00:02:00 UTC the next day) BVOL will move about as much as the basket of MOVE and BTC-PERP contracts does, and iBVOL will move the inverse amount (unless there's an intraday rebalance).

Multiple Days

However, over longer time periods Volatility Tokens will perform differently than a static position. This is because they rebalance each day to roll to new contracts and return to their target leverage.

The long-term performance of Volatility Tokens therefore depends on the relative performance of the MOVE and BTC-PERP contracts they hold on the days they hold.

Rebalance Times

BVOL tokens’ performance will be +/-1x the performance of the underlying instruments if measured since the last rebalance time. In general BVOL tokens rebalance every day at 00:02:00 UTC. This means that the token’s performance over the trailing 24 hour period might not be exactly +/-1x the performance of the underlying basket of MOVE and BTC-PERP contracts, rather it will reflect the movement in the underlying instruments since 00:02:00 UTC.

In addition, iBVOL tokens that are over-leveraged rebalance whenever their leverage reaches4/3. This happens when the underlying basket of MOVE and BTC-PERP contracts are up 33% in a day. Accordingly, iBVOL tokens’ performance will be +/-1x the performance of the underlying instruments since the asset last moved 33% that day if there was a large move which resulted in an intraday rebalancing, and since 00:02:00 UTC if there wasn't.

 

What fees apply to trading Volatility Tokens? 

Please refer to the PDS for further details of our trading fees. In addition, there is a 0.03%/day management fee on Volatility Tokens. This is taken out of the net asset value of the Volatility Tokens. You won't see an actual token balance decrease or any charge in your account.

 

 

Volatility Tokens are complex products, suitable for experienced investors only. They provide exposure to the volatility of the bitcoin price. The price of cryptocurrencies such as bitcoin are more volatile than the price of assets like shares. Volatility Tokens are also subject to certain risks you should understand before trading, including market price variance risk, portfolio turnover risk and interest rate risks (see Question 6 above). These risks, coupled with the use of leverage, means that an investment can result in significant gains or losses. If movements in the market for these products or bitcoin decrease the value of your position, you may be required to have or make additional Collateral. If your Collateral falls under the minimum margin requirements we set, your position may be liquidated at a loss, and you will remain liable for any deficit in that Collateral.

 

Clients of FTX Australia should read the PDS, the Terms, TMD, the FSG and Privacy Policy in their entirety before making any decision to trade Volatility Tokens. Copies are available here.

 

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