Bitcoin a stable investment? Volatility falls below Nasdaq, S&P 500

Bitcoin a stable investment? Volatility falls below Nasdaq, S&P 500

A silver lining to Bitcoin's recent sideways trend is that the cryptocurrency is now in uncharted territory: Bitcoin's volatility is relatively low compared to the stock market.

Bitcoin's volatility has fallen below that of the Nasdaq and S&P 500 stock indexes for the first time since 2020, according to data from Kaiko. Today, Bitcoin's volatility is down more than 40% from its most volatile point so far this year in February.

On Tuesday, Cboe's Volatility Index (ticker VIX), a measure of the price fluctuations of the S&P 500, hovered just below 30, which is the widely accepted mark for increased uncertainty, risk and fear in markets. The VIX is up nearly 13 basis points since the start of the year.

The Nasdaq 100 volatility index (ticker VOLQ) is also on the rise so far this year. It's up more than 90% since the start of the year.

“In the first half of 2022, cryptocurrencies reacted very strongly to macro market events such as inflation data releases, interest rate hikes and stock market volatility,” said Clara Medalie, head of research at Kaiko. “Bitcoin’s correlation with Nasdaq and the S&P 500 shot to all-time highs in the spring as global financial markets entered a period of high volatility.”

Cryptocurrencies as a whole have generally become less reactive to the release of sensitive economic data, Medalie added, which may explain the overall decline in volatility compared to stock markets.

Bitcoin's correlation coefficient to the S&P 500 has hovered between 0.5 and 0.6 over the past three months, which is relatively high in comparison historical data but traders hope the digital asset begins to distance itself from stocks.

“It is likely that ‘digital gold’ [bitcoin] can decouple like gold and trade independently,” Dan Morehead, CEO and co-chief investment officer at Pantera Capital, wrote in a note on Tuesday. “In the first rising interest rate environment in 42 years, there will be a desire to invest in things that don't have to fall further as the Fed resolves its twin errors.”

The Federal Reserve's interest rate decision next month could bring renewed volatility to crypto, but traders are generally bullish on Bitcoin for now.

"It's at these levels that we see value in Bitcoin; either it becomes a hedge against geopolitical and macroeconomic uncertainties, or it becomes a high-beta asset again," said Jon de Wet, co-founder and chief investment officer of digital asset firm Zerocap.

Bitcoin tended to be inversely correlated with the movements of 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 as it declines and tests a support area between 110 and 111, which coincides with its 50-day moving average.

If the dollar turns lower, risky assets could benefit.

“One thing is for sure, volatility tends to mean reversal – and long-term volatility strategies are worth looking at,” he said.

In other words, the sustained period of volatility contraction that crypto markets have experienced in recent months will likely give way to volatility expansion at some point. And like a constantly coiling spring, the longer volatility remains muted, the stronger the move - up or down - is likely to be.

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