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Can Bitcoin’s Price Measure Stock Market Volatility?

Can Bitcoin’s Price Measure Stock Market Volatility?

Crypto markets and traditional investment vehicles have very little direct connection. Although Bitcoin is making progress via futures contracts, digital currencies still primarily function as an alternative to traditional investments like stocks. After all, cryptocurrencies were born in a spirit of rebellion, and this ethos is prevalent throughout the crypto community.

However, there is growing evidence that the stock market and the crypto market may be more aligned than many people think.

Measuring Market Volatility Using Bitcoin

The stock market and crypto markets have been on a similar trajectory since crypto’s nascent rise in early 2017. Both markets soared in value through the new year, and both have been plagued by volatility this year. Interestingly, the price of Bitcoin has consistently preceded the stock market by several weeks.

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This trend has led some to question if the price of Bitcoin may be an indicator of the stock market’s future value. Dominic Chu of CNBC Business News described Bitcoin as a possible “tea leaf” that stock market investors might use to determine investment strategy.

It’s not unusual for traders to rely on secondary markets to determine possible future stock prices. For instance, many investors rely on the CBOE Volatility Index (VIX) as a way to measure stock market volatility and potential future prices.

Brian Stutland, the managing member at Equity Armor Investments, explained in a recent interview with Fast Money:

“There is a huge correlation right now between VIX and Bitcoin 30 days ago … That’s what crypto currency is becoming. It’s becoming a way to sort of de-risk yourself from credit risk in the banking industry.”

In addition to using Bitcoin as a volatility meter, Stutland sees Bitcoin as a way for investors to protect their assets during periods of unique volatility. He likened the use of Bitcoin to bankers “essentially storing their money under their pillow in the form of virtual currency.”

An Imprecise Measurement

Some commentators question whether Bitcoin is truly a fair judge of volatility or if traditional secondary markets like the VIX are just slower to react to market realities. Moreover, there is little evidence that stock investors are routinely using the price of Bitcoin to determine future trades.

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Even so, this wouldn’t be the first time that investors attempted to use Bitcoin to measure other markets.

In March, Tom Forest, the chief investment officer at Forest Capital Management characterized Bitcoin as a helpful sentiment indicator for different markets. Evidently, crypto markets and traditional financial markets are not completely separate after all.

Bitcoin | BTC

Updated: May 31 at 5:26 am PDT
$7,555.01
0.31%

Bitcoin, currently ranked #1 by market cap, is up 0.31% over the past 24 hours. BTC has a market cap of $128.93B with a 24 hour volume of $4.87B.

Chart by CryptoCompare

Bitcoin is up 0.31% over the past 24 hours.

Cover Photo by Nadine Shaabana on Unsplash

Filed Under: Analysis, Bitcoin, Price Watch
Bill DeLisle

Bill is a writer who frequently covers cryptocurrency and the fintech movement. He lives in the Indianapolis area with his wife and two kids.

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