An intriguing relationship has been noticed between the bitcoin price and CBOE’s volatility index, also colloquially known as Wall Street’s “Fear Index.” The presumed connection could explain Bitcoin’s sudden surge in price the last few months and, by extension, the recent success of crypto in general.
Investors Look to Cryptocurrency and Other Riskier Investments
According to financial strategist Masao Muraki and his team at Deutsche Bank, there is an increasing correlation between Wall Street’s Fear Index and the bitcoin price — something they’ve observed since at least the beginning of December.
The “Fear Index” is an average measure of Wall Street’s price stability, with a low measure meaning less fluctuation and a high measure meaning more price fluctuation. The correlation between Bitcoin’s price and the volatility index has been observed to be negative.
Thus, the significance of this correlation is that it seems to suggest that people in general — but institutional investors especially — are moving away from traditional assets as the stock market’s volatility decreases. Rather, they are putting their money into bitcoin and potentially other large cryptos instead.
The implication is that a stable market is basically boring investors who want larger returns on investments and, to satisfy that desire, have gone into bitcoin and crypto — creating the recent bitcoin price surge in the process.
Speculation Is the Prime Mover, Or Is It?
While a correlation may exist between Wall Street volatility and bitcoin, the belief that it has been the chief cause of bitcoin’s recent price movement assumes that its value is largely speculative.
While this is a common narrative and perception among media outlets and analysts respectively, it is being increasingly challenged by more and more people — with the Winklevoss Twins spearheading this pushback.
According to Cameron Winklevoss, bitcoin’s price is indicative of much more than just speculation — personally believing that it derives much of its price and value from its network effect.
“We’ve seen the bubble term thrown around and it’s just not the right way to look at this,” he said. “Social networks grow in value exponentially based on the number of users and participants. The difference between one and 100 is dramatic — 100 and a million is that much more dramatic and exciting. As more people join it gains more value.”
Others are echoing this sentiment such as Troy University Professor of Economics Malavika Nair, who has argued that Bitcoin is, in fact, not a bubble because it has not displayed stereotypical characteristics of an economic bubble.
What’s your opinion of the Deutsche Bank’s claims? Do you think there is a connection between the “Fear Index” and Bitcoin’s recent price surge? Lets us hear your thoughts.
Images via Bloomberg, Getty Images