A Volatility ETP (Exchange-Traded Product) is a financial instrument that tracks an index measuring the expected volatility of an underlying asset or market. In the context of crypto, these ETPs aim to provide investors with exposure to the future expected price fluctuations of digital assets, rather than their direct price movements.
Mechanism
Volatility ETPs typically gain their exposure by investing in a portfolio of short-term futures contracts on volatility indices, such as the VIX for traditional equities, or analogous indices for crypto markets. The constant rolling over of these futures contracts creates a complex dynamic, often leading to contango or backwardation effects that influence performance.
Methodology
Investing in Volatility ETPs involves a strategic understanding of market sentiment, futures curve dynamics, and the inherent decay associated with these products due to contango. These instruments are generally employed for short-term hedging against potential market downturns or for speculative bets on increased price turbulence, rather than for long-term directional exposure to the underlying asset itself.
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