Low volatility on Wall Street is forcing investors to look to less traditional asset classes like bitcoin in pursuit of better returns. And perhaps some more excitement.
There is a dramatic increase in the correlation between the price of bitcoin and Wall Street’s ‘Fear Index’, according to analysts at Deutsche Bank. A Friday note from global financial strategist Masao Muraki at Deutsche Bank argued that the “correlation between Bitcoin and VIX has increased dramatically”.
The Chicago Board Options Exchange Volatility Index (VIX) is colloquially referred to on Wall Street as the Fear Index. It is the most widely reported barometer of expected near-term stock market volatility. VIX measures a market estimate of future volatility. It is currently at near record-low levels, meaning investors expect nothing much to happen in the stock market.
The NYSE has enjoyed a nine-year bull market, the second-longest in recent financial history. The US economy is growing at a steady rate, recording annual GDP growth at around 3.2% in the third quarter of 2017. While the 20x P/E ratio average among US equities is approaching overvaluation, a steadily growing economy provides solid support for valuation fundamentals.
Simultaneously, the low interest rate policy the Fed initiated in the wake of the recession that followed the Global Financial Crisis in 2008 has been prolonged. Since dragging interest rates down to zero during the financial crisis, the Fed’s policymaking committee has raised rates only five times. The most recent hike was in December, lifting the benchmark short-term federal funds rate by a quarter percentage point to a range of 1.25 to 1.5 percent.
Protracted low interest rates forced investors to the stock market to seek decent returns on their money. The market has risen steadily due to this TINA effect (TINA is the acronym for There Is No Alternative). Now the low VIX is forcing them to look even further, to frontier asset classes. The cryptocurrency market is the beneficiary of those moves, Deutsche Bank argues.
Between December 2017 to the time of writing, the VIX has sat at historically low levels, suggestion extremely low market volatility. The cryptocurrency market in the same period has seen wild fluctuations, with double-digit gains and losses over a 24-hour period just a normal day in the crypto-space.
On December 22nd, for example, the bitcoin price plunged 22%. Yet it had been up 91% since a month earlier. According to coinmarketcap, Tron, a lesser-known cryptocurrency, doubled in price over 36 hours from January 17th to 19th.
These rapid and dramatic swings, familiar to cryptocurrency enthusiasts, are catching the attention of a Wall Street crowd seemingly bored with too little to fear.
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Last modified: May 20, 2020 9:09 PM UTC