FTX volatility tokens are ERC-20 tokens that aim to track the implied volatility of crypto markets. There are currently two FTX volatility tokens: BVOL and IBVOL. BVOL targets tracking the daily returns of being 1x long the implied volatility of BTC and IBVOL targets tracking the daily returns of being 1x short the implied volatility of BTC.
Volatility tokens hold and trade FTX MOVE contracts. This means they get their exposure to the underlying assets through MOVE contracts and are subject to the price movements, premiums, market conditions, and trading fees of MOVE contracts. In particular, each BVOL token aims to hold 1/6th of each BTC-MOVE contract that has not yet had its strike price determined at the time of each rebalance. The strike price is a predetermined price at which you can trade an asset in the future. That means BVOL aims to hold 1/6th of each of the following contracts:
- Tomorrow's BTC-MOVE contract
- Next week’s BTC-MOVE contract
- One week after next’s BTC-MOVE contract
- Two weeks after next’s BTC-MOVE contract
- Next quarter's BTC-MOVE contract
- The quarter after next’s BTC-MOVE contract
The inverse, IBVOL, aims to hold -1/6th of each of the above contracts.
Here’s an example of the BTC-MOVE contract breakdown in action:
Date: April 13, 2020
BVOL Token Net Asset Value (NAV): $5,000
IBVOL Token Net Asset Value (NAV): $3,500
Name |
Contract |
Price |
Approx. Contracts per BVOL Token |
Approx. Contracts per IBVOL Token |
BTC-MOVE-0414 |
Tomorrow |
$248 |
3.360 |
- 2.352 |
BTC-MOVE-WK-0424 |
Next Week |
$690 |
1.208 |
- 0.845 |
BTC-MOVE-WK-0501 |
In 2 Weeks |
$358 |
2.328 |
- 1.629 |
BTC-MOVE-WK-0508 |
In 3 Weeks |
$488 |
1.708 |
- 1.195 |
BTC-MOVE-2020Q3 |
Next Quarter |
$2,319 |
0.359 |
- 0.252 |
BTC-MOVE-2020Q4 |
In 2 Quarters |
$2,053 |
0.406 |
- 0.284 |
So, how are these tokens created and redeemed?
Each volatility token gets its price action by trading FTX MOVE contracts. Let’s say you want to create $1,000 worth of BVOL. To do so, you would send $1,000 to FTX and the FTX BVOL account would buy $1,000 worth of the relevant FTX BTC-MOVE contracts, making BVOL 1x long BTC-MOVE.
Now let’s say you want to redeem your BVOL tokens for their net asset value. You would send your $1,000 of BVOL back to FTX to redeem it. This will destroy the token, cause the BVOL account to sell back the $1,000 worth of BTC-MOVE contracts, and credit your account with $1,000.
The creation and redemption process is what ultimately aligns the value of volatility tokens with what they set out to be. This process is only recommended for advanced traders and is explained here to help you understand how volatility tokens receive and maintain their price.
What about rebalancing, how does that work?
Similar to leveraged tokens, volatility tokens rebalance every day at 00:02:00 UTC. Rebalancing is when each volatility token trades on FTX to once again reach its target volatility exposure and roll its positions. There are two types of rebalancing that occurs with volatility tokens: rolling and standard rebalancing.
Rolling
BVOL and IBVOL aim to represent Bitcoin’s implied volatility, AKA the market’s guess at how volatile Bitcoin will be. To do so, the tokens need to only hold BTC-MOVE contracts where strike prices have not yet been determined. Once a strike price for one of the MOVE contracts has been determined, BVOL and IBVOL will roll to buy the next applicable MOVE contract.
Each day BVOL and IBVOL will “roll” and perform the following actions:
- Sell any BTC-MOVE contracts that recently had their strike price determined
- Buy the relevant newly listed BTC-MOVE contracts
Continuing with the example above, on April 13th at 00:02:00 UTC, BVOL and IBVOL would do the following transition:
Previous Contract Name |
New Contract Name |
Contract |
BTC-MOVE-0413 |
BTC-MOVE-0414 |
Tomorrow |
BTC-MOVE-WK-0424 |
BTC-MOVE-WK-0424 |
Next Week |
BTC-MOVE-WK-0501 |
BTC-MOVE-WK-0501 |
In 2 Weeks |
BTC-MOVE-WK-0508 |
BTC-MOVE-WK-0508 |
In 3 Weeks |
BTC-MOVE-2020Q3 |
BTC-MOVE-2020Q3 |
Next Quarter |
BTC-MOVE-2020Q4 |
BTC-MOVE-2020Q4 |
In 2 Quarters |
In this case, only the daily BTC-MOVE contract would be rolled. At the beginning of a new week or new quarter, the week and/or quarter BTC-MOVE contracts would be rolled as well.
Rebalancing
Since BVOL targets +1X leverage, it will not need to significantly alter its leverage each rebalancing time. There may be small amounts of slippage from time to time but by and large its leverage should be 1X.
IBVOL, however, is targeting -1X leverage and will need to be rebalanced daily. If Bitcoin’s volatility has decreased, IBVOL will have gains and will reinvest them by selling more BTC-MOVE contracts. If Bitcoin’s volatility has increased, IBVOL will have losses and will buy more BTC-MOVE contracts to reduce risk and attempt to avoid liquidation.
Because of their structure, BVOL typically will avoid liquidation risk but IBVOL is at risk if volatility doubles in a day. Daily rebalancing in addition to rolling will help to mitigate liquidation risk for IBVOL tokens. If there is significant market volatility in a given day and IBVOL's leverage reaches a certain threshold, there will be an intraday rebalance to reduce risk.
Here’s how FTX manages rebalances and reduces risk of liquidation for their volatility tokens:
- FTX periodically monitors for IBVOL leverage. If IBVOL’s leverage goes above 4/3 in magnitude, it triggers a rebalance.
- If a rebalance is triggered FTX will calculate the number of units of the underlying contracts that IBVOL needs to buy and/or sell to return to -1x leverage, marked to prices at that time.
- The formula for this rebalance is:
- Desired position (DP) = [Target Leverage] * NAV / [Underlying Mark Price]
- Current Position (CP) = Current holdings per token of the underlying
- Rebalance Size = (DP - CP) * [Tokens outstanding]
- The formula for this rebalance is:
- Then, FTX will create orders on their BTC-MOVE orderbook to rebalance. They will send a maximum of $1M of orders per 10 seconds until the total desired size has been sent.
- These orders are all normal, public IOCs that trade against the prevailing bids and offers in the orderbook at the time.
- This rebalancing process ignores the difference between the underlying price when a rebalance is triggered and when it happens, ignores fees, and may have rounding errors.
And how are volatility tokens expected to perform?
Each 24 hour period between rebalancing and rolling periods, volatility tokens will have their target performance. For example, each day (from 00:02:00 UTC to 00:02:00 UTC the next day) volatility tokens will move about as much as the basket of BTC-MOVE contracts does and IBVOL will move the inverse amount, unless an intraday rebalance is triggered.
However, over longer time periods volatility tokens will perform differently than a static position. This is because they rebalance and roll each day to return to their target leverage. Their long-term behavior depends on the relative performance of the underlying BTC-MOVE contracts on the days they hold them.
Volatility tokens' performance should be +/-1X the underlying performance since the last rebalance time. Volatility tokens rebalance and/or roll every day at 00:02:00 UTC and therefore trailing 24 hour moves may not be exactly +/-1X the underlying performance throughout each day.
If an intraday rebalance occurs for IBVOL, a volatility token’s performance should be +/-1X the BTC-MOVE contracts since the asset last moved 33% that day. If there is not a large move and IBVOL does not require a rebalance, the volatility token’s performance should be +/-1X the BTC-MOVE contracts since the most recent 00:00 UTC.
Volatility tokens are based on MOVE contracts, how do those work?
MOVE contracts represent the absolute value of the amount a product moves over a set period of time. For example, if Bitcoin moves $125 from the beginning to end of a day, the BTC-MOVE contract will expire to $125 regardless of if Bitcoin’s price increased or decreased.
Going long on MOVE contracts means you will realize the most gains if the asset’s price moves a lot in either direction the next day. Shorting MOVE contracts means you will realize more gains when the asset’s price is relatively stable.
MOVE contracts are similar to futures except instead of expiring to the price of a token, they expire to the amount its price moved (or its volatility). Learn more about MOVE contracts and how strike prices are determined on FTX’s Help Center.
Please note: FTX’s volatility tokens are high-risk products that can gain or lose large amounts of their value in a day, will perform differently than other tradable assets, and will likely not sustain their target returns long-term. While volatility tokens can be helpful tools for traders, it is not recommended to hold these assets long-term. Use caution when trading these assets and only trade them if you understand how they work. Learn more about FTX’s volatility tokens on our Help Center.