Volatility Index Paints a Gloomy Picture for Bitcoin, Equities

A key measure of market volatility is pointing to an extended bear market, and it’s bad news for bitcoin, analysts say. 

The CBOE VIX Index, which measures volatility based on the S&P 500 options market and generally has an inverse relationship with equities, shows big investors’ demand for hedges. 

In the beginning of 2022, traders were thrown when lows in the S&P 500 index were not accompanied by VIX highs. 

In recent weeks, the VIX has still increased as stocks have dipped, but not to the expected levels, Tom Essaye, founder of Sevens Report Research said. 

“The good news is that the recent S&P lows in mid-October did show a VIX of 34, the same [index low that preceded the 1990 recession],” Nicolas Colas, co-founder of DataTrek Research, said. “The bad news is that every other recessionary market low — even 2002 — coincided with a higher VIX than that.” 

The VIX is down about 12% over the past month, while the S&P 500 has rallied around 6%. But, in the past five days, the VIX has shot up nearly 13%, still sitting only at around 22, while the S&P 500 has dropped a modest 2%.

“We remain in a liquidation phase of the market cycle during which more sophisticated, institutional investors are selling their long-term equity holdings,” Essaye said.

“Institutional money managers are the biggest players in the options market as they continually hedge their long equity positions during cyclical bull markets and that explains why when stocks go down, the VIX goes up,” he added. 

A rising VIX is going to be a warning that stocks are in for a drawdown, Essaye said, and if bitcoin continues trading like Big Tech, the cryptocurrency is in trouble, too. Bitcoin was trading fairly flat at around $17,180 at time of publication. 

“With risk appetite not improved, bitcoin continues to trade around $17,000 and await upcoming data,” Craig Erlam, senior market analyst at Oanda, said. “Unfortunately for bitcoin, the timing means it never participated in the last risk rebound and there isn’t much appetite to make up for lost time.”

Bitcoin’s bear market still has some steam, Galaxy Digital research analysts wrote in a note Friday. 

“Bitcoin is currently trading about -75% from its last all-time high. Prior bear markets saw lows at -83.5% on Dec. 13, 2018, -85% on Jan. 14, 2015, and -93.5% on Nov. 18, 2011,” analysts noted. 

Even though the S&P 500’s latest rally has seen the index claw back more than 15% of its year-to-date lows, the trend remains bearish, Essaye said. 

“Tech and growth stocks have recovered some ground on value recently but we continue to believe that progress in the economic recovery and subsequently higher interest rates will be a headwind for tech and a rotation from growth to value can be utilized to reduce tech overweights,” Essaye said.

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