The low volatility in stocks, with the market seemingly moving in one direction of ever increasing prices, is apparently sending traders towards more volatile assets, like bitcoin and crypto in general.
So says Masao Muraki, global financial strategist at Deutsche Bank, in a note to clients. Telling them the “correlation between Bitcoin and VIX [volatility index] has increased dramatically.”
Stock market volatility has been very low recently to the point of in-effect non existent, with more risk inclined traders moving to crypto. Muraki says, according to Business Insider:
“Cryptocurrencies are closely watched by retail investors, affecting their risk preferences for stocks and other risk assets.
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).”
Correlation does not imply causation and even if it did, it’s not clear which is causing which, but the relationship between stocks and crypto is interesting, not least because crypto prices are now directly affecting some global companies.
AMD and Nvidia might be the clearest example due to their GPUs being in heavy demand for ethereum mining, but more indirectly IBM and Microsoft may also be affected by the success, or lack of success, of blockchain tech.
As such crypto might be entering the big league, with the market now a competitor of not just gold, but also potentially stocks, due to higher potential levels of rewards, as well as risk.