Bitcoin Is Becoming the Market’s Fear and Volatility Indicator, Investor Argues

Omar Faridi
  • Cryptocurrencies are “becoming a way to sort of de-risk yourself from credit risk in the banking industry”, according to Equity Armor CIO Brian Stutland.
  • Bitcoin and CBOE’s Volatility Index have a “huge correlation,” which indicates that Bitcoin can also be used to gauge fear and volatility in traditional financial markets.

Brian Stutland, Managing Member at financial planning and portfolio management firm Equity Armor Investments, has recently stated that Bitcoin is like the new VIX, referring to CBOE’s volatility index, which gauges market expectations “of near-term volatility” according to S&P 500 Index option prices.

Stutland’s comments came during CNBC’s “Fast Money.” During the show he claimed Bitcoin, like VIX, can now be considered an indicator of fear and volatility in traditional financial markets. Stutland stated:

"There is huge correlation right now between VIX and bitcoin 30 days ago, 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."

Brian Stutland

Holding Crypto Is Like Storing Money Under A Pillow

Per Stutland, cryptocurrencies are still an unregulated way for investors to transfer capital. These can, for example, convert their fiat money into cryptocurrencies when banking institutions increase credit risks. He said:

“Bitcoin is a way to 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."

Brian Stutland

The investment professional added that there’s a positive correlation between market volatility and credit risk, as when there’s an increase in credit risk, there seems to be a proportional increase in market volatility.

Notably, 2017 wasn’t a very volatile year for the stock market, especially if compared to the cryptocurrency ecosystem. Various analysts suggest institutional investors have not yet made their way into the crypto market because of challenges they’d face with safely and securely storing cryptocurrencies. The added liquidity is set to, presumably, reduce volatility.

Cryptocurrency custodian services and regulated crypto exchanges will reportedly help solve the problem, and some businesses are already looking into it. As reported, UK’s LMAX Exchange, which has facilitated the trade of $10 trillion in fiat currency, recently announced plans to launch a regulated cryptocurrency exchange

VIX rose to a high of 18.39 on Tuesday, after falling to a low of 12.59 last Friday. The Dow Jones Industrial Average also closed almost 500 points lower on Tuesday. Meanwhile, Bitcoin is currently trading at around $7,520, down from almost $10,000 on May 5 according to data from CryptoCompare.

CME Looks to Double Bitcoin Futures Limit, but Is This Wise?

The Chicago Mercantile Exchange (CME) has a new request for its regulator, as it looks to double open position limits on bitcoin futures contracts in the face of significant interest.

Nasdaq reports that the CME has already petitioned its regulatory body, the Commodity Futures Trading Commission (CTFC), asking for an increase from 1000 contracts per spot month to 2000 per investor. Each contract represents five BTC, so essentially, at its peak,  a single investor's total position may edge towards a monumental 10,000 BTC.

This is in direct response to the contract's recent growth which is currently depicting record levels of activity, citing $370 million being traded per day. A spokesperson for the CME noted that the idea to increase limits was proposed on the continued maturity of the market:

Based on the significant growth and acceptance of our financially-settled CME Bitcoin futures markets, as well as our analysis of the underlying bitcoin market.

However, as Nasdaq writes the increase in the upper limit of positions is somewhat superfluous. As of July, the number of open interest contracts reached an all-time high of just 6100; given this, it seems the CME may be future-proofing.

Open to Manipulation?

However, concerns remain about the limit increase, as without them, the potential for manipulation rises; often to the detriment to the underlying asset. Although, as per the CTFC website, the threat of manipulation from bitcoin futures contracts is "low":

In general, position limits are not needed for markets where the threat of market manipulation is non-existent or very low.

Instead, Nasdaq posited that this might point to a lessening on the CTFC's strict rule of bitcoin; as well as a maturing of the market in general.

Nevertheless, some believe the CME's bitcoin futures contracts do pose a significant threat to the price of BTC; with some suggesting that blatant manipulation continues unchecked within the market.

As reported, there seems to be a correlation between the expiry dates of CME bitcoin futures contracts and a lull in the price point of BTC. In several instances, a significant drop in bitcoin's price has coincided with a closure from the CME. The most recent example of this occurred on Labor Day, September 2, when bitcoin rose an extraordinary 8% shortly after the CME shut.

Crypto analyst, Alex Kruger, highlighted this, noting the large gaps which formed on the CME chart, from the price discrepancy before and after closing.

This has become a pretty accepted practice within the market. Kruger has even gone to the lengths of compiling statistics each time this phenomenon transpired:

On these occasions, bitcoin cited an average 4.6% price discrepancy following the close of the CME.

Whether this is a coincidence or the market is indeed being actively manipulated is as yet unclear. Either way, with the increase of these limits it might be only a matter of time until we know for sure.

Featured Image Credit: Photo via Pixabay.com