- In general, cryptocurrencies have generally become less reactive to the release of sensitive economic data.
- Indices tracking price fluctuations in the S&P 500 and Nasdaq are on the rise this year
A silver lining to Bitcoin’s recent sideways trading is that the cryptocurrency now resides in uncharted territory: Bitcoin volatility is relatively low compared to equity markets.
For the first time since 2020, bitcoin’s volatility fell below both the Nasdaq and S&P 500 stock indices, according to data from Kaiko. Today, bitcoin’s volatility has dropped more than 40% from its most volatile point ever in February this year.
On Tuesday, Cboe’s Volatility Index (ticker VIX), a measure of the S&P 500’s price volatility, hovered just below 30, the generally accepted sign for rising uncertainty, risk and fear in the markets. The VIX is up about 13 basis points to date.
The Nasdaq-100 Volatility Index (ticker VOLQ) has also been bullish so far this year. It has seen an increase of over 90% to date.
“For the first half of 2022, cryptocurrencies have reacted highly to macro market events such as the release of inflation data, interest rate hikes and stock market volatility,” said Clara Medalie, Kaiko’s head of research. “Bitcoin’s correlation with the Nasdaq and S&P 500 hit all-time highs in the spring as global financial markets entered a period of high volatility.”
Medalie added that cryptocurrencies in general are less responsive to the release of sensitive economic data, which could explain the overall decline in volatility relative to equity markets.
Bitcoin’s correlation coefficient with the S&P 500 has hovered between 0.5 and 0.6 for the past three months, which is relatively high compared to historical data, but traders are hopeful that the digital asset will begin to distance itself from equities.
“Possibly ‘digital gold’ [bitcoin] Pantera Capital CEO and co-investment chief Dan Morehead wrote in a note Tuesday. “In the first rising interest rate environment in 42 years, there will be a desire to invest in things that don’t need to keep falling as the Fed fixes its twin mistakes.”
The Federal Reserve’s rate decision next month could bring new volatility to cryptos, but traders are generally optimistic about bitcoin for now.
“We see value at these levels in Bitcoin; “Either it’s a hedge against geopolitical and macro uncertainty, or it’s reconnected as a high beta asset,” said Jon de Wet, co-founder and chief investment officer at digital asset firm Zerocap.
Bitcoin tends to be inversely proportional to movements in the US Dollar Currency Index (DXY), which has been in a strong uptrend since March. While this long-term trend remains intact, the dollar’s momentum has recently slowed down to test a support area between 110 and 111, which coincides with its 50-day moving average.
Risk assets could benefit if the dollar turns to the downside.
“One thing is for sure, volatility means reversal – and long-term volatility strategies are worth a look,” he said.
In other words, the prolonged period of volatility contraction that crypto markets have experienced in recent months is likely to lead to volatility expansion at some point. And like a constantly twisting spring, the longer the volatility is quiet, the stronger the up or down movement.
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Casey Wagner
block works
Senior Correspondent
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