Is Bitcoin Really A Leading Indicator For The Entire Market?

At the start of February, just before the great vol-quake, we highlighted  that a curious correlation was emerging between the VIX – and therefore the broader market as would be confirmed just days later – and bitcoin. We referenced a recent note from Deutsche Bank according to which “cryptocurrencies are closely watched by retail investors, affecting their risk preferences for stocks and other risk assets.” It continued:

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). 

Adding to this, we pointed out the correlation that had emerged between bitcoin and the VIX…

… and added that “the correlation between Bitcoin and VIX can increase as more institutional investors begin trading Bitcoin futures.”

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.

Two weeks later, and just days after the first market correction in years which some say was presaged by the crash in cryptos just prior, none other than Bank of America’s Chief Investment Strategist Michael Hartnett made the same, apocryphal for some, observation namely that “the next lead indicator is…Bitcoin.”

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Author: Travis Esquivel

Travis Esquivel is an engineer, passionate soccer player and full-time dad. He enjoys writing about innovation and technology from time to time.

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