Risk On Trade Correlation Between Bitcoin And Wall Street's Fear Index Raises Alarm Bells

Deutsche Bank’s Global Financial Strategist Masao Muraki published a report showing how Bitcoin’s price is inversely related to the Chicago Board of Exchange’s VIX index (nicknamed the Fear Index). The VIX uses options to calculate near term volatility for the S&P 500 and is a good gauge of investor sentiment.

[Ed note: Investing in cryptocoins or tokens is highly speculative and the market is largely unregulated. Anyone considering it should be prepared to lose their entire investment.]

A lower VIX number indicates investors are expecting less volatility and a higher VIX indicates higher expected volatility. A lower VIX corresponds to investors being more complacent about the equity markets, and a higher VIX means investors are more uncertain about the markets direction.

Muraki’s graph starting on December 1 last year shows that as the VIX decreases, the white line, Bitcoin’s price moves higher, the orange line. This is the Risk On trade. Conversely as the VIX increases Bitcoin’s price tends to fall. This is the Risk Off trade.

Long-term trend of the VIX and S&P 500

While it has had short-term spikes higher, the VIX has been on a downward trend since 2009 when it was in the 80’s during the stock market bottom. It closed at 11.08 on Friday.

The S&P 500 has done the opposite and has climbed from 676.53 in March 2009 to an all-time high of 2,872.87 on Friday. While there are multiple reasons for the upward move in the S&P 500, decreased volatility is one of them. At the end of this note I’ve included 10 year charts for the VIX and S&P 500.

Risks to Bitcoin’s price

I’ve written a Forbes article outlining 12 reasons that Bitcoin’s price could fall to $1,000, and volatility in general was one of them. While the VIX could move lower, which would be positive for Bitcoin’s price, there is a limit to how low the VIX can go.

There are multiple reasons the VIX could move higher. The U.S. Fed could raise interest rates faster than expected; various central banks could slow their quantitative easing; President Trump could negatively impact trade or the markets could become concerned about valuation levels. I believe the last one has lower odds due to solid earnings and the U.S. corporate tax cut.

If the market’s start to become more concern and the VIX rises, which leads to a Risk Off trade mentality, Bitcoin’s price will probably take a hit.