Entering the cryptocurrency market is a relatively new venture for most investors.
Its decentralized and unregulated nature proves compelling for countless people, especially those who do not want to deal with the increased credit risks in traditional financial markets. Many investors now consider Bitcoin as a fear gauge to determine which way the market moves next.
For many years, the CBOE Volatility Index (VIX) has been used to measure the fear and volatility in the marketplace. This has earned it the nickname, “fear gauge,” although it can also indicate complacency at times. The VIX comes from the prices of options premium in the S&P 500 index. Essentially, it’s an indicator of the expectation of how volatile the market will be.
Over the past couple of months, however, many investors have seen a correlation between Bitcoin and VIX. This has led to the usage of the Bitcoin as a measure of credit risk in the market. Financial analysts say that many investors enter the cryptocurrency market to reduce credit risks often linked to the banking industry.
For active investors, this is something to keep an eye on. After the unbelievable rise in the value of Bitcoin and other virtual currencies in 2017, people have started to transfer their capital into virtual coins. It has also prompted investors to use cryptocurrency trading programs like Crypto Code to automate the trading process and get their hands on their preferred cryptocurrencies at the right prices. But now, the cryptocurrency market can also serve as an indicator of when to transfer capital into other financial vehicles in the face of increasing credit risks.
Bitcoin offers the opportunity for investors to move their money from the balance sheets of banks into their own virtual wallets. Through this, they can be exempt from high credit risks and maintain the overall value of their investment portfolio. It’s a clever way of safeguarding assets, one that continues to be adopted by investors across the globe.
The correlation between credit risk and market volatility cannot be denied. Financial analysts explain that when banking institutions increase credit risk, a proportional increase in market volatility follows. The cryptocurrency ecosystem remains more volatile by a large margin compared to the stock market. This can be attributed to the fact that institutional investors have yet to enter the cryptocurrency market because of uncertainties in safely storing their virtual coins. In theory, the volatility of the market can be reduced once it sees more liquidity.
This challenge is now being addressed in the form of regulated cryptocurrency exchanges. But as of now, investors are taking advantage by converting their capital into well-known and trusted virtual coins such as Bitcoin as they try to avoid the hefty credit risks that hurt their investment profile. There continues to be a strong correlation between Bitcoin and VIX, and it’s interesting how investors will use this data to figure out when to turn to alternative financial vehicles and shy away from traditional banking institutions.