Is The VIX-'Tail' Wagging The Bitcoin-'Dog'?

While Bitcoin has bounced back above $9,000 miraculously today, after its early collapse, if Deutsche Bank's Masao Muraki is right, VIX's spike is signaling cryptocurrencies have a lot further to fall...

The recent 'triple-low environment' of low interest rates, low spreads, and low volatility gave birth to new asset classes like implied volatility (ETFs selling volatility), and cryptocurrencies. Deutsche Bank has begun to monitor these indices closely as new frontiers of risk-taking.

The prices of both asset classes have plummeted and rebounded simultaneously, and in 2018, correlation between Bitcoin and VIX has increased dramatically.

Besides them being a new frontier of risk-taking, Deutsche see another similarity between these two new asset classes: “the tail wagging the dog.”  

First, implied volatility. Implied volatility is an index calculated from the price of a derivative product (options) of an underlying marketable security. However, we now have a “tail wagging the dog” situation where the price of the derivative product is feeding back into the price of the underling marketable security.

Next, cryptocurrencies. Cryptocurrencies are closely watched by retail investors, affecting their risk preferences for stocks and other risk assets. Although institutional investors recognize that stocks and other asset valuations may have entered bubble territory (US equities’ average P/E is around 20x), they cannot help but continue their risk-taking. Now, a growing number of institutional investors are watching cryptocurrencies as the frontier of risk-taking to evaluate the sustainability of asset prices. The result is that institutional investors, who are supposed to value assets using their sophisticated financial literacy, analysis, and information-gathering strengths, are actually seeking feedback about the market from cryptocurrency prices (which are mainly formed by retail investors).  

We believe the correlation between Bitcoin and VIX can increase as more institutional investors begin trading Bitcoin futures.

And as we can see today, implied volatility (VIX) is feeding back directly into the prices of Japanese stocks and Bitcoin... dragging them both lower.

Last year, cryptocurrencies experienced “melt-up,” a situation where prices surged, irrespective of fundamentals, because a flood of investors seeking capital gains outstriped supplies. If the current “triple-low environment” persists, and inflation rate and the likelihood of a recession remains low, we believe this “melt-up” phenomenon could spread to other products, creating massive asset bubbles.

On the flip side, Deutsche warns that predicting the timing of an asset bubble’s collapse is fraught with difficulty.

Investors required to seek out high returns, even in the current “triple-low environment,” are under pressure to manage assets near their fund’s value-at-risk (VaR) upper limit (CTA, macro funds and volatility-targeting funds such as variable annuity funds and risk parity funds). This means that, structurally, they will increase their holdings of stocks and other risk assets when volatility declines, but reflexively dump risk assets when volatility rises.  

*  *  *

All of which suggests that if VIX keeps rising then expect Japanese stocks and Bitcoin to keep tumbling.

Comments

Arnold Xibalba Sat, 02/03/2018 - 07:39 Permalink

Correlation is not causation, but can be indicative.

New Maff requires new thinking.

We look at the old stuff, and kind of shake our heads at the fact that much of it is not predictive any more.
Take EPS, for instance,now an unreliable indicator of corporate health...

Vix, as a trade able commodity has been around since 1991.
Bitcoin since 1999, and as a trade able commodity since 10,000 bit for a couple of pizzas.

All 'new' Maff, as they begin to have a history...
A six month correlation is enough for speculation.

In reply to by Xibalba

putbuyer IH8OBAMA Fri, 02/02/2018 - 18:52 Permalink

Correct!

Lets use our brain on this. 1st, 2 months of data is No months of data to do any type of determinate analysis.

2nd, What is the difference between Bitcoin and PayPal? Look at it this way - I buy Bitcoins to do transactions like I buy PayPals to do transactions. Both I have exchanged dollars for.

3rd, What is the difference between Western Union\MoneyGram and Bitcoin. I use dollars to fund Western Unions and MoneyGrams while the money is in transit. I do all to do transactions - all 3 I have exchanged dollars for.

The beauty of Bitcoin is I have the added value of speculation for appreciation or suffer a loss.

In reply to by IH8OBAMA

adr Lumberjack Fri, 02/02/2018 - 17:21 Permalink

Fuck Eversource, I made sure to move to a town they didn't service so I didn't get screwed by their $.38 per kWh price. Or get hosed by retroactive price increases for past "peak" demand. Like people who saw $.80 per kWh on their bill two winters ago.

That's why Eversource customers are all going for solar panels. You can't afford not to.

They purchase electricity for less than $.08 and sell it to customers for $.38. There isn't a hot enough spot in hell for Eversource executives.

I'm still pissed about having to pay $.16 per kWh even after the local utility put up four wind turbines and four solar farms. I thought renewables were supposedly cheaper than everything else now. Some idiot was claiming solar power is generated for $.02 per kWh. Maybe in the desert after the panels are paid for.

 

In reply to by Lumberjack

Lumberjack adr Fri, 02/02/2018 - 18:03 Permalink

Slowlar (sic) panels are not that effective for heavy users. I went to a clients house to find out why their bill hadn’t been reduced as much as the solar folks claimed. After doing a load analysis I came to this conclusion. 

In Ma, (are you from Kingston?) winter sun and snowstorms didnt help his cause, very large home largely incandescent lighting and a heated pool. 

Poor load analysis by the solar folks and bullshit performance promises was the culprit. 

Net energy billing is now going to be challenged. I’m one of the crew who helped establish the practice back in 98-2001 and once again, like the last oil crisis the bullshit artists crawled out from under their rocks and fucked it up again...

I’m a big fan of LED lighting, nat gas heat, hot water and clothes drying. No need for expensive solar (unless you know what you are doing and like off grid). My electric bill stays quite low. I see electricity prices tripling if this wind/solar fraud gets any worse. After this fbi Russian thing, they need to go after the crony fraudsters associated with Obama and billions of wasted stimulus money.

oh, and fuck GE....

In reply to by adr

Yen Cross Fri, 02/02/2018 - 15:59 Permalink

  The carnival barkers at CNBS and FAUX Business are in full-on bullshit mode.  Charles Payne is a fucking moronic idiot! He's says that the 10year @ 3.00% is nothing because rates were so much higher in the past.

  Hey Charles, you fucking genius, the National debt wasn't over $21 trillion back then. There wasn't $15 trillion of central bank slush floating around back then. Corps weren't asses and elbows deep in debt, from buybacks.

 P.S.the DOW just took out the 200h-4.

shizzledizzle Fri, 02/02/2018 - 16:02 Permalink

Whatever... I get my investment direction from scattering chicken bones on the ground and reading the future from them. It's every bit as accurate as inverse, aspect ratio adjusted, upside down charts showing correlation and thinking its causation. 

RealistDuJour Fri, 02/02/2018 - 16:41 Permalink

I wonder if we're going to see that the turnaround in the cryptos was initiated by Tether-related purchases from the Bitfinex exchange?  Cuz I'm sure allll of those Tethers weren't just poofed into existence and that they were allll bought with real USD...  Sorry, I almost choked on my laughter as I typed.

Brazen Heist RealistDuJour Fri, 02/02/2018 - 16:54 Permalink

Notice how certain agendas are clinging onto the Tether narrative for dear life....just like the previous narratives? And now they have invested alot in this narrative and will try to crash Bitcoin to prove themselves. 

I miss the old days when crypto was mainly a Libertarian cyber punk movement, before all the morons jumped on board and tainted it with their petty egos.

In reply to by RealistDuJour

adr Brazen Heist Fri, 02/02/2018 - 17:32 Permalink

The Libertarian cyberpunks were only able to get Bitcoin up to a few bucks in value. The black trenchcoat Magic the Gathering crowd drove the price to double digits.

Then came the morons who pumped it to $1200 and made the Magic the Gathering crowd think they were investment geniuses. We know how that turned out.

Then the real scam artists came in and said, "Fuck, if those guys could con people out of a thousand dollars per coin, we can take them for tens of thousands."

We are now seeing how that is playing out.

In reply to by Brazen Heist

Lastline Fri, 02/02/2018 - 18:00 Permalink

If anything it makes more sense that big money will take profits and dump traditional assets ie. stocks and bonds from their massive 9 yr run up and put in into something new like cryptos.  

Besides, WTF are they going to do with all that cash?  Give away to charity.. lol

putbuyer Fri, 02/02/2018 - 18:24 Permalink

Lets use our brain on this. 1st, 2 months of data is No months of data to do any type of determinate analysis.

2nd, What is the difference between Bitcoin and PayPal? Look at it this way - I buy Bitcoins to do transactions like I buy PayPals to do transactions. Both I have exchanged dollars for.

3rd, What is the difference between Western Union\MoneyGram and Bitcoin. I use dollars to fund Western Unions and MoneyGrams while the money is in transit. I do all to do transactions - all 3 I have exchanged dollars for.

The beauty of Bitcoin is I have the added value of speculation for appreciation or suffer a loss.

Do you get it now?