What is VIX volatility and what does it mean for Bitcoin?

The market is probably the best place to get information. Through market indicators, you can see people's desires and pains in real time from the candlestick chart. From 9:30 a.m. to 4:00 p.m. on weekdays, you can see the game of capital, insider information, and the aggregation of beliefs of people with decades of game experience.

Right now, the market is telling us two things: (1) The market is very fearful and uncertain about the future, and (2) The market believes that Bitcoin is a good investment… The second point is particularly important, and I will explain why below :

Market sentiment

When economic conditions are good, investors are willing to take on greater risks to generate higher returns. Public equity, private equity, real estate, and venture capital all perform well during this time.

When the economy is bad and/or the future is opaque, investors flee risk in order to preserve their wealth. Like a fire at a movie theater, they rush to the door as fast as possible to strip risky assets into cash. Then, the winning asset classes during this time are usually government bonds, commodities, and defensive stocks, which meet their needs.

In other words, people generally seek to reduce volatility and counterparty risk during turbulent times.

How we measure financial volatility

In the world of finance and investing, we have two main ways to measure volatility (aka “risk”).

First, we look at historical volatility through metrics such as standard deviation and mean. This is simply a matter of analyzing the volatility of an asset over the past 12 months and assuming that volatility will be similar over the next 12 months. But since past performance never determines future performance, this is not the most reliable method.

Second, let's look at "implied volatility". Implied volatility is a way to predict future conditions based on current option prices. Options are simply bets on the volatility of an asset in the future - if future volatility exceeds our expectations, the buyer of the option wins; if future volatility is less than our expectations, the seller of the option wins. It's a bit like gambling.

Now, implied volatility is not the end-all, be-all. After all, no one can predict the future with 100% certainty. That being said, these predictions are actually made by the people who are at risk in the markets on a daily basis. Therefore, implied volatility is one of the best measures we have.

So, what is VIX volatility?

The VIX index is a benchmark indicator that aggregates the implied volatility of all 500 companies in the S&P 500 index.

This is a real-time market index (often called the "fear index") that reflects how volatile the market thinks the market will be over the next 30 days. It is probably the best way to capture market sentiment.

When the VIX is expected to be low, the economy is stable, unemployment is usually low, people like to spend money, and investors are often willing to take a lot of risk because they believe their investments will produce excess returns. If the VIX is expected to be high, the economic outlook is uncertain, and people are often skeptical and sometimes even fearful about the future. Since there will still be bills to pay and food to eat in the future, investors tend to sell their investments to meet their immediate cash needs.

Historically, the VIX has spent most of its time hovering between 10 and 20. But every 7 to 10 years, it can spike dramatically.

For example, in 1998 the index spiked to 44.28 amid political and economic uncertainty about Russia’s future. During the 2008 financial crisis, the VIX was close to 60. In March 2020, during the coronavirus hysteria, the VIX rose to 54, and arguably would have been higher without the massive government fiscal stimulus package. And now, on November 2, 2020, the VIX is close to 40, the highest level in nearly six months.

Of course, we are one day away from the most polarized election in U.S. history, and the country is losing the battle against an invisible enemy. With COVID-19 cases surging in the U.S. and Europe, a dark winter is likely ahead. Congress has yet to agree on a stimulus package to spur a recession.

So, over the past month, the VIX (fear) has risen 50%…

Historical price chart for the last month (VIX) provided by Yahoo Finance

The S&P 500 fell…

Nasdaq is popular...

And Bitcoin is soaring . . .

Implications

On one hand, the VIX has climbed 50% in the past month. In other words, there has been a 50% increase in market uncertainty and fear about the future. On the other hand, Bitcoin has risen 25%. This means that not only has it decoupled from public stocks, but in the midst of all this chaos and uncertainty, people are increasingly looking to Bitcoin as a safe haven investment.

I want to emphasize it again: people are scared, and they are trusting Bitcoin at an increasing rate.

If that weren’t enough, in the past few months we’ve seen public companies MicroStrategy and Square announce that they are converting large amounts of US Treasury bonds into Bitcoin. In addition, Fidelity and JP Morgan Chase have stood out as Bitcoin supporters by recommending a 1% to 5% portfolio allocation to their investors.

Furthermore, the heavy short-term investments made by institutions in companies within the S&P 500 are coming to an end. Perhaps they are considering allocating a small amount to Bitcoin? The “smart” money – is jumping on the bandwagon.

But most importantly:

The markets are our best source of information, and they have thought long and hard about Bitcoin, and maybe you should make your choice too.