Is Bitcoin The New Volatility Gauge?

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by: Jeff Malec

"Bitcoin is becoming the new VIX," said Brian Stutland, President of Equity Armor Investments on CNBC's Options Action segment as the markets were taking a tumble last week. His evidence? The very short 6-month window showing the correlation between the VIX Index and Bitcoin, as well as the assumption that investors that are pulling their money out of the market and putting it into Bitcoin:

"If you want to know what the market is going in the next 30 days, look at what bitcoin did 30 days ago. When we overlay the two together, there is huge correlation between VIX and Bitcoin 30 days ago.

Bitcoin is a way for investors to move money off the balance sheet of banks and into their own wallet. Essentially, they are storing them money under their pillow in the form of virtual currency. You're worried banks are going to have some sort of credit risk. As credit risk increase, we get more volatility."

Is it that investors are actually taking money out of the market (pushing stocks down and VIX up) and into Bitcoin (pushing Bitcoin up), or is it that Bitcoin has marketed itself as the antithesis of markets and every chink in the armor of the establishment (markets) is a feather in the cap for the anti-establishment (Bitcoin)?

Or is it that the blue squiggly line just happens to overlap the red squiggly line (with a 30-day lag) in a purely coincidental curiosity? We'll take the latter. Just consider the following MarketWatch chart from this Josh Brown blog post showing the high correlation between the Dow "now" and before the great market crash of 1929.

Bitcoin new VIX

Scary indeed... but now look back at the fine print on the X-axis. That's the 2012-2014 period... not now. Updating that chart with current data would show we're up several trillions of dollars in market cap, or about 73%, since then. Jeff Bezos himself has made more money since the end of that chart than probably 90% of all of humanity has made in the entirety of the world before that time. So, color us a bit skeptical that Bitcoin and VIX lining up for a short stint mean anything significant.

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