Week 48–2018: The first AIVIX chart and Implied Probability
An excursion why it is important to choose in what to measure your P&L and the effect of correlation
The AIVIX this week
First here you can see a chart of the AugurInsider AIVIX indexes this week.
The peak was reached during Friday when crypto prices fell again by a lot in a short time, but volatility came back down quite a bit in the last couple of hours and is lower now than at the beginning of the week.
We will add a chart like this as a standard feature to AugurInsider soon.
Implied Probability explained
One KPI we calculate for every listed market is the Implied Probability. Here is a short description on why this matters.
Profit and Loss in USD
AugurInsider uses $ as basis for P&L (= Profit and Loss calculation) and not ETH as does Augur itself. This means we believe as long as you can not use crypto assets as your main currency to pay taxes and everything else, most people probably will care how much money they make or loose in terms of fiat currency, which base measurement arguably is still the US-Dollar.
This desire can also be seen by the way market creators set up derivatives on Augur. They are usually bets relative to the USD value of an underlying crypto assets.
This in conclusion means any KPI calculation has to take into account the exchange rate from ETH to USD.
A simple constructed example: Let’s say you bet 1 ETH on a 50:50 chance that the ETH value will go up from 120$ to 500$. On a ETH basis you will win 1 ETH when the event comes true, so you now have 2 ETH, but on a $ basis you just bet 120$ and when the exchange rate rises to 500$ and you win an additional ETH token, you suddenly have 2 ETH tokens worth 1000 $, which obviously makes a huge difference in how to calculate your probability and volatility KPIs. AugurInsider factors these effects in.
Correlation between crypto assets
Also we take into account the relatively high correlation between crypto assets.
An example why this is relevant. You can now bet ETH which has a $ value of let’s say 120$ on the event of BTC being over 20k$ at the end of the year. The market on Augur gives this event a probability of 3%, but if this event would actually occur the ETH you would win would also be worth a lot more with a high probability, because ETH and BTC a correlated a lot.
The Implied Probability KPI
The crypto asset correlation plus the P&L in USD effect from the above paragraphs manifest themselves in the probability difference of the calculated Implied Probability on AugurInsider versus the current probability derived from the augur market directly. (see screenshot)
Here you can see our Implied Probability for this BTC price bet is only 0.7% instead of 3% at the moment. (Which means the current share would be fairly priced if the event is about 0.7% probable instead of 3% which would be the right number if you only care about ETH P&L with no ETH/BTC correlation)
This might be somewhat unintuitive and something where AugurInsider can help you to determine the true Implied Probability of your trades.
About us
AugurInsider is building the authority for KPIs about derivative markets on the decentralized market protocol Augur that lives inside the Ethereum blockchain.
