Brian Stutland, who is from Equity Armor Investments, stated during the CNBC’s Fast Money segment on May 29 that the future of the financial markets could be predicted by analyzing Bitcoin prices.
“Bitcoin is sort of becoming the new VIX, in sort of getting ahead of credit risk in the banking industry. There is huge correlation right now between VIX and Bitcoin 30 days, 30 trading days ago, that is starting to measure out credit risk in the market. That’s what cryptocurrency is becoming. It’s becoming a way to sort of de-risk yourself from credit risk in the banking industry.”
VIX is known as the CBOE Volatility Index, which measures the fear and volatility of S&P500 stocks in the marketplace. Stutland, however, mentioned to CNBC that Bitcoin works equally well as an indicator or a fear gauge in the market.
The CNBC contributor also asserted that, since the cryptocurrency industry is highly unregulated especially as a means for investors to exchange capital, it makes sense for investors to move over the cryptocurrency industry when they’re going for high risk and high gain opportunities.
“Bitcoin is a way for investors to basically move their money off the balance sheets of banks and into their own wallets. Essentially storing their money under their pillow in the form of virtual currency. As credit risk increases we get more volatility in the market.”
The VIX indicator reached a score of 18.39 on Tuesday though it was very low on Friday, May 25, at 12.59. As per CoinMarketCap, Bitcoin’s value was approximately $7,279 on May 29. Its value, however, was at $7,600 late last week.
Correlation Between Bitcoin and VIX Has Increased Dramatically
Analysts at Deutsche Bank also share a similar opinion with Stutland. In January 2018, Business Insider reported Masao Muraki — a global financial strategist — along with Tao Xu and Hiroshi Torii stated in a note to clients that the “correlation between Bitcoin and VIX has increased dramatically.”
In January 2018, the market volatility was extremely low, which represented very little to no significant fluctuations. Investors, subsequently, began to look elsewhere for riskier investments.
Muraki, Xu, and Torii said:
“Cryptocurrencies are closely watched by retail investors, affecting their risk preferences for stocks and other risk assets. Although institutional investors recognize that stocks and other asset valuations may have entered bubble territory, they cannot help but continue their risk-taking. Now, a growing number of institutional investors are watching cryptocurrencies as the frontier of risk-taking to evaluate the sustainability of asset prices.”
Muraki believes that, as traditional assets drop in volatility, the price of Bitcoin and other popular cryptocurrencies will rise as investors find alternative means of making money.
Institutional Investors Looking to Enter the Cryptocurrency Market
Bitcoin can be an excellent indicator of the fear in markets today. However, in 2017, the stock market did not experience significant volatility compared to the cryptocurrency industry.
Some believe that this was the case due to institutional investors and how they have not yet embraced the cryptocurrency industry because of the extreme volatility, lack of regulations, and inability to securely store large amounts of cryptocurrencies.
Many companies are, however, creating products and services for institutional investors to enter the market. Financial Times even reported that UK-based LMAX Exchange is set to launch a cryptocurrency exchange designed for institutional investors soon.
David Mercer, the CEO of LMAX Exchange, said:
“We are furthering the legitimization of the cryptocurrency market by offering institutions a platform on which to acquire, trade, and hold cryptocurrencies securely with high quality, deep liquidity. The rise of institutional trading of cryptocurrencies will be a game changer for the industry. We believe our new exchange will support the transformation of the crypto market form the fringes to the mainstream.”