Finally, a viable Bitcoin hedging option?
Region: Europe
Feb 21, 2018, 12:44:45 PM Published By Wirex Team
While the meteoric rise in Bitcoin prices takes a much-needed pause, there's good news on the horizon for BTC holders looking for a viable way to hedge exposure. The CBOE Volatility Index (VIX) is progressively becoming the firstinversely-correlated asset (to my knowledge) to provide moderate protection against wildly fluctuating Bitcoin prices. Up until now, Bitcoin remained on an island of its own. As reported byBusiness Insideron January 21st, Deutsche Bank global financial strategist Masao Muraki is increasingly finding a negative correlation link between the VIX and various cryptocurrencies. This is a potential game-changer for investor adoption, as the dearth of hedging options is relegating many would-be investors to the sidelines. Not only does Muraki observe that the "correlation between Bitcoin and VIX has increased dramatically" in 2018, but he goes on to note "a growing number of institutional investors are watching cryptocurrencies as the frontier of risk-taking to evaluate the sustainability of asset prices". That's powerful stuff. Before we get into how a sustained VIX-BTC inverse asset correlation is a game changer, let's take a look at how this correlation has been developing. Over the past 90-days, the VIX-BTC correlation has seen significant divergence. It has moved from a non-linear relationship (<0.1, Dec. 4-6), to one bordering moderate negative relationship (>0.3, current). The same cannot be said for stocks or crypto's other big brother, Ether, which have flatlined and risen respectively. Take a look.
Even extreme recent U.S. dollar weakness has failed to stem Bitcoin's harrowing drop from $19,000 in mid-December. Despite DXY falling about 6-percent since that time, Bitcoin has continued to plunge lower. This exemplifies how little influence U.S. dollar strength/weakness has exerted on Bitcoin prices to date. Not only is Bitcoinfallingin tandem with the dollar, it's falling about 600% faster over the past 40 days! One simply has to glean a Cryptocurrency Correlation Matrix to understand the incredible challenges facing Bitcoin hedging today. All of Bitcoin's peers are positively-correlated (red), while the S&P 500, gold and VIX have proven ineffective on a 365-day horizon. Again, energy, USD, Yen - all major currencies - no linear inverse relationship has been established. (Source:Sirf Data)
Correlation among assets is the degree to which they move in tandem. A value of zero denotes no (linear) dependence between the assets. The results can be interpreted as follows:


- 0.5 to 1: Strong positive relationship
- 0.3 to 0.5: Moderate positive relationship
- 0.1 to 0.3: Weak positive relationship
- -0.1 to 0.1: No linear relationship
- -0.1 to -0.3: Weak negative relationship
- -0.3 to -0.5: Moderate negative relationship
- -0.5 to -1.0: Strong negative relationship