Is Bitcoin an Alternative VIX for Gauging Market Volatility and Fear?
Originally published on: BTCMANAGER
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May 31, 2018
Bitcoin price movement and volatility might well be a reliable indicator of how the overall market is likely to behave during regular trading hours. According to Brian Stutland, of Equity Armor Investments, the largest cryptocurrency is somehow becoming the next Volatility Index or VIX, for determining the credit risk in the banking industry.
Bitcoin vs. CBOE VIX
— Options Action (@OptionsAction) May 29, 2018
Professionals have long used the CBOE VIX as a measure of volatility and fear in the marketplace. After carefully studying bitcoin’s price movement and comparing it with VIX price action, Stutland believes the virtual currency could also be used to determine investor’s sentiments in various marketplaces.
“There is huge correlation right now between VIX and bitcoin 30 days ago, 30 trading days ago, that is starting to measure out credit risk in the market,” Stutland said.
“That’s what cryptocurrency is becoming. It’s becoming a way to sort of de-risk yourself from credit risk in the banking industry.”
Bitcoin price movement has always seemed to have had a ripple effect on the broader cryptocurrency sector. The pioneer cryptocurrency’s rally has most of the time been associated with growing investor confidence in the industry; a stance that has always had a positive impact on other cryptocurrencies. Other digital assets also tend to edge lower whenever bitcoin takes a drop.
It remains to be seen if professional investors will keep a close eye on bitcoin’s price movement as a way of gaining a head start on the volatility in the broader, well-regulated stock market. The fact that cryptocurrencies are in many ways unregulated means most traders would be extremely cautious in using bitcoin to gauge investor confidence in the mainstream sector.
Bitcoin Rallies, Dow Plunges
The correlation between Bitcoin and VIX was brought to question on May 29, 2018, as the virtual currency held steady while the broader market came under immense pressure. The cryptocurrency rallied from the $7,100 to highs of $7,400.
In contrast, all the major indices had a turbulent day, closing on the red as the Dow Jones Industrial Average shed nearly 400 points, amid losses in Goldman Sachs, Boeing, and JPMorgan. The S&P 500 was down 1.16 percent as the NASDAQ lost 0.5 percent to finish the day at $7,396.
The sell-off was triggered by political turmoil in Italy that sent the Euro tumbling. Things turned from bad to worse on the revelation that the U.S. and China are still far off on trade talks. Tuesday’s sell-off marked the third consecutive day of losses for the Dow and the S&P 500.
Bitcoin Weekly Outlook
Bitcoin bounced back after hitting its lowest level in May 2018 near the $7,000 handle. The cryptocurrency had come under pressure early in the week after it emerged that the Department of Justice had opened an investigation over possible price manipulation allegations. There have been claims that people with vast holdings might be engaging in illegal trading practices in a bid to swing prices of the cryptocurrency to their advantage.
Bitcoin appears to have bounced back following the allegations after rallying from the $7,100 handle to above the $7,400 mark. Given that the crypto is still trading in a downtrend, it may have to rise and close above the $7,750 handle, if it is to be considered a buy from the current level.
After plunging from the highs, the crypto appears to have found support at the $7,500 handle, from where it is trying to make a comeback. The long-term outlook shows bears taking control especially on the virtual currency falling and trading below $7,500.