Wall Street's "Fear Index" nears yearly high, is Bitcoin now a safe haven asset?

According to research, a volatility index called VIX has been steadily rising, and this volatility index shows a very high correlation with the price of Bitcoin.

So far, both the traditional financial markets and the cryptocurrency markets have experienced turbulence in August. The decline in bond yields and the inversion of the yield curve have been widely discussed. The yield curve has been in an inverted state before the previous three economic recessions in the United States, making it an important indicator of an impending economic downturn.

Concerns about a possible economic recession in the United States have led to significant volatility in global stock markets, foreign exchange, and commodity prices, with Bitcoin and the crypto market being no exception.

In addition to the high correlation between Bitcoin and gold, studies have also shown a positive correlation between Bitcoin and the VIX volatility index.

VIX

The Volatility Index (VIX), created by the Chicago Board Options Exchange (CBOE), is a real-time market index that tracks the 30-day volatility of a basket of S&P 500 index, also known as the "fear index" on Wall Street.

• Higher volatility indicates that investors expect sharp fluctuations in the S&P 500 index.
• Lower volatility indicates that options traders expect smaller and more stable fluctuations in the S&P 500 index.

Due to heightened tensions among countries and concerns about an economic recession due to the US-China trade war, the VIX surged to 24 in early August. As the trade war eased slightly, the VIX subsequently fell to around 18.

Correlation between Bitcoin and VIX

Previously, ABM reported on the correlation between Bitcoin and gold. Federal Reserve Board (FED) Chairman Jerome Powell has also stated that Bitcoin, like gold, is a valuable store of value.

In addition to gold, the correlation between VIX and Bitcoin is becoming closer. The following chart shows the historical data of the 90-day volatility between BTC and VIX, with a correlation coefficient close to +0.2.

The correlation between the two reached its highest level since January 2017. The correlation coefficient reached +0.3 at the end of December 2015, when the S&P index plummeted to 1880 and Bitcoin surged from 300 to nearly 500 USD.

Despite the increasing correlation between BTC and VIX, the correlation between Bitcoin and gold remains high. The following chart compares the correlations between BTC/VIX, BTC/gold, and BTC/DXY US dollar index.

The research points out that the blue and red lines were mostly in the rising area in 2019, while the US dollar index shows a negative correlation or no correlation with Bitcoin.

These correlations have been increasing since the second quarter of 2019 and have become more pronounced, as shown by the arrows below. VIX and gold are mostly positively correlated with Bitcoin, while the US dollar index has a slightly negative correlation with Bitcoin.

Regarding this data, Masao Muraki, global financial strategist at Deutsche Bank, also emphasized the growing correlation between cryptocurrencies and the VIX. In a report to clients last year, Muraki pointed out:

This correlation is related to a low volatility environment, which encourages investors to turn to higher-risk assets such as cryptocurrencies to achieve substantial investment returns.

Although it is still early to say that Bitcoin is a safe haven in times of economic turmoil, legendary investor Mark Mobius had previously criticized Bitcoin as a "real fraud."

However, he has recently changed his stance and stated:

I believe the rise of cryptocurrencies will increase demand for hard assets like gold, and Bitcoin and cryptocurrencies will "live happily ever after."

Further Reading

• Weiss Cryptocurrency Ratings: These two projects are better than BTC
• Is Bitcoin being used on the dark web? Research shows that transactions in fiat currency on the dark web are 800 times higher than in Bitcoin

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