Exploring the Relationship Between VIX and Bitcoin A New Friendship
In this article, we will focus on the new bonding between VIX and Bitcoin. This volatility indicator can help you navigate the digital asset market.
Key points
Data shows that the correlation between BTC prices and the VIX is almost a year high.
Global uncertainties drove the VIX higher and could create additional opportunities for cryptocurrencies.
Investors should cross-reference the relationship information prior to settling on a trading decision..
Overview
Up to this point, August has been an unpredictable month for the cryptocurrency and financial markets. Security yields and modified yield bends have been broadly examined as of late, and stresses over a possible downturn in the US prompted a few major swings in worldwide stocks and FX and commodities prices. Of course, BTC and crypto were no exception.
Besides the high correlations between BTC and gold, the leading cryptocurrency has also shown relationships with the CBOE VIX, and that tie is getting closer.
Against the background of the US-China trade war, the Brexit adventure, and the rising international pressures all over the planet, unpredictability can be anticipated to have a greater upward in the short/medium term. How could we use these correlations to improve BTC investment decisions?
What is VIX?
The Volatility Index or VIX is made by the Chicago Load up Choices Trade (CBOE) and is an ongoing business sector file that tracks the 30-day suggested unpredictability of a container of S&P 500 record choices. The “Fear Index” and “Wall Street Fear Indicator” are other names for it.
A higher VIX suggests that traders expect the S&P 500 to become more volatile and stressful.
A lower VIX indicates that options traders expect the S&P 500 to be less volatile and more stable.
The VIX rose above 24 in early August due to high tensions in the US-China trade dispute and recession concerns. The VIX then fell to around 18, coupled with trade optimism and global economic talks.
Previously, we examined the correlation between BTC and gold, the leading cryptocurrency’s distinguishing feature making it a safe haven and hedge against market uncertainties, and we believe that the peculiarities of BTC were at least partially behind BTC’s recent rally.
Besides Gold, we have also observed that the VIX has been increasingly correlated with BTC.
Figure 2 shows the historical data of the 90-day correlation between BTC and the VIX, and the correlation coefficient is approaching +0.2. Although the number is not optimal at this time, it is possible that the breakout will develop into a new trend of positive correlation given the highly uncertain environment. The correlation level between the two is close to the highest level since January 2017. The correlation coefficient exceeded the value of +0.3 at the end of December 2015, when the S&P nosedived to 1880 levels, and BTC rose from 300 to almost 500.
Despite the connections between BTC and the VIX becoming ever closer, BTC’s correlation with gold has remained high. Figure 3 compares the correlations between BTC / VIX, BTC / Gold, and BTC / DXY (US Dollar Index). The blue and red lines have been in positive territory for most of 2019, while DXY has shown mostly negative or no correlation with BTC.
Figure 3: BTC-VIX (Red) / BTC-Gold (Blue) / BTC-DXY (Gray) Roll Correlation (90 days)
While it is still too early to convince all risk-averse investors that BTC is a safe investment, recently turned veteran investor Mark Mobius believes the rise of the cryptocurrency will amplify demand for hard assets like gold. Mobius, once called Bitcoin a “real scam,” but changed his stance earlier and believes that Bitcoin and cryptocurrencies will be “ alive and well ” in the future.
Traditionally, DXY and gold have an inverse relationship, and that is the same case as with VIX and commodities, which also have a negative correlation. Although BTC and crypto as a broad asset class are relatively new to the markets, their long-term correlations with traditional assets are yet to be determined. However, in the world of low inflation and stagnant growth, it is becoming increasingly difficult for traditional money managers to generate higher investment returns, and many of them turned to cryptocurrency. It is fair to say that crypto and traditional assets are likely to get closer rather than further. In fact, investment banks have put crypto under their radar.
In late January 2018, Masao Muraki, Global Financial Strategist at Deutsche Bank, highlighted the increasing correlation between cryptocurrencies and the VIX. In a note to his clients, Muraki said: “The correlation refers to a low volatility environment that encouraged investors to invest in riskier assets such as cryptocurrencies in order to obtain reasonable returns on their investments.”
Check your data
You can notice that the BTC – VIX correlation shown in Figure 2 was constantly changing. It had previously fallen below -0.2 to +0.3. This could mean that investors should not always look at things from only one perspective or rely on the same correlation when making trading decisions. For example, often BTC and the VIX were in an inverse correlation back in 2018, and the way they relate to each other has changed regularly. So the ideal strategy would be to use aggregated data, such as combining other correlations and exchange/asset flow data, to produce positive results.
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Conclusion
In a world where interest rates are extremely low and uncertainty for sustainable global growth is high, market volatility is expected to become higher. We have looked at the correlation between the VIX and BTC and compared the connection with other assets and indices, the VIX could be another BTC reference that could help investors and traders when it comes to cryptocurrency trend discovery, however, the emerging BTC – VIX relationship is not a call to rush out and buy BTC, rather, it is one of the signs that cryptocurrency trading and investing is becoming more and more mainstream.
