Price decline for Bitcoin looming as VIX rises back above 20
The Bitcoin price has currently stabilized strongly around the $17,000 mark. However, the price may face further headwinds in the coming days, as the VIX reveals.
The VIX is a real-time volatility index from the Chicago Board Options Exchange (CBOE). It was created to quantify the market’s expectations of volatility.
By doing so, the VIX is forward-looking, meaning it only shows the implied volatility of the S&P 500 (SPX) over the next 30 days.
Basically, if the VIX goes up, the S&P 500 is likely to go down, and if the VIX goes down, the S&P 500 is likely to stay flat or go up.
This is exactly what was seen yesterday. The VIX jumped up to 19, a level last seen in mid-August. As a result, the S&P 500 lost the weekly support area of 4,040 and fell 1.8%. In August, the last time the VIX was this low, it rebounded and the S&P 500 fell 15%.
Importance of VIX for Bitcoin
Besides the VIX and the S&P 500, it is important to understand that Bitcoin, with its higher beta, is highly correlated with the S&P 500. This means that the Bitcoin price is more sensitive to changes in the market in either direction.
As predicted by the VIX, BTC returned the horizontal resistance of $17,400 yesterday and fell below $17,000.
In October, when the VIX was down and the S&P 500 was up, Bitcoin experienced a Black Swan event with the FTX collapse, after which BTC fell to $15,500. Thus, the Bitcoin price did not enjoy the momentum of the VIX.
At the moment, a possible reversal of the VIX at 19 could act as a kind of sentiment barometer for the S&P 500 and Bitcoin in the coming weeks. The VIX is being compared to the 2006-2009 crash, a nasty prospect that would mean much lower prices.
Analyst Sam Rule writes that the recent BTC post-stock rally comes at a time when the VIX is depressed to a level of 20. While there has been a massive industry wipeout in the crypto industry, the stock market has yet to experience such an event.
Given Bitcoin’s correlation with the S&P 500, this could mean another price drop, usually write:
Is 25% reduction from ATH all we get in the S&P 500 this cycle during the start of the great alt bubble? Would you expect #BTC to bottom here if the SPX scenario fell >40% from ATH in the coming months?
SPX move from ATH 1 week, Source: Twitter
Why VIX has limited applicability to BTC
However, the VIX should not be used as the only deterministic indicator of future market direction. Why?
The VIX relies on expectations set by past events rather than what will happen in the future. Investors are notoriously prone to irrational exuberance.
In addition, the VIX cannot account for sudden, unexpected events that may cause strong market reactions. However, these events are key to identifying a change in market direction, such as a bear market bottom.
Therefore, Bitcoin investors should also keep an eye on other factors, such as the upcoming decision by the US Federal Reserve on further interest rate policy, further contagion effects in the crypto market, and other intrinsic factors, such as miner capitulation.
