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How the VIX Could Pave the Way Higher for Bitcoin and Risk-On Assets

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Bitcoin could be at a major turning point in its lifecycle, but the risk hanging over the global markets may get in the way. According to the VIX, a measure of anticipated market volatility has been elevated all throughout 2020 to the highest point since the Great Recession.

The metric could lose a key support level that would let high-risk assets like Bitcoin, stocks, and other crypto assets to fly. If support holds, however, things could get extremely dangerous leading into the 2020 presidential election. 

Election, Inflation, Recession, and a Pandemic: Is It the Right Time to Take on Risk?

Markets have been irrational ever since stimulus efforts began pumping the money supply. The stock market went from the worst collapse in years, to one of the greatest rallies on record.

RELATED READING | WHAT TO EXPECT FROM BITCOIN FOLLOWING THIS WEEK’S FED MEETING

Bitcoin crashed from $10,000 to $4,000, and is already back well above the critical resistance level and is currently attempting to flip it to support.

The cryptocurrency’s success in doing so could hinge on another completely unrelated chart losing important support., That chart is the CBOE VIX – a volatility index measuring the expected volatility in the S&P 500.

CBOE VIX Volatility Index Retesting Support  | Source: TradingView

It is currently hovering at a level that, in the past, breaching above led to a rollercoaster ride across markets. Falling back below it could bring some much-needed calmness to the world of finance.

A fall even deeper back into the “teens would be mega bullish for all risk assets” claims the CEO and Founder of the Trading Dojo. But why?

Bitcoin Rallies When VIX Reveals Risk is at Its Lowest

Taking the VIX index and adding it to a BTCUSD price chart reveals some interesting correlations with Bitcoin throughout its short price history.

Bitcoin appears to pump each time the VIX experiences a bout of tranquility rather than the turbulence we’ve seen in 2020 thus far.

bitcoin btcusd vix cboe

BTCUSD Bull Rallies Conicide With VIX Calm  | Source: TradingView

Each time the VIX has fallen into the teens, as the analyst says, Bitcoin has rallied, and the rest of the high-risk crypto market followed its lead. The most recent period of calm led to the top at $14,000, and before that was the crypto asset’s all-time high at $20,000. Before that, the VIX easy street paved the way for Bitcoin’s then-record at $1,200.

RELATED READING | WHY LACK OF LEVERAGE COULD KEEP BITCOIN AND STOCKS CLIMBING DESPITE SELLOFF

A fall back below 20 and into the teens could be exactly what Bitcoin needs for its bull run breakout. However, if VIX holds the support pictured in the first chart above, another massive crash is possible.

Whatever the case may be, the VIX could provide clues as to what happens next, and investors should be watching the metric closely to find out.

Featured image from DepositPhotos, Charts from TradingView





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Bitcoin

Bad call? Bitfinex bears closed a block of Bitcoin shorts before the drop below $32K

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Bitcoin price is still in a rut, trading near $33,000 and trapped in a downtrend that just seems to get worse with the passing of each day. As the price slumps, analysts have consulted with several technical and on-chain metrics to explain the price collapse, but none of these have picked up on the exact reason. 

One area of interest has been the sharp rise in short positions at Bitfinex in the past week. Traders are placing exaggerated importance on these Bitcoin (BTC) margin shorts as if they are predictors of the current market crash. Still, as Cointelegraph previously reported, analysts forget that Bitcoin margin longs are usually much larger.

On June 18, longs outnumbered Bitfinex shorts by at least 22,800 BTC, but 87% of the short positions were closed before June 22. Currently, margin longs are 43,850 BTC higher than the amount shorted.

While those shorts are usually savvy traders, it is unlikely that they knew in advance that Chinese banks would prevent their clients from engaging in activities involving crypto trading or mining.

More importantly, these bearish positions were built while MicroStrategy was buying $500 million in Bitcoin after a successful senior secured note private offer. To make things worse, Michael Saylor’s business intelligence firm announced the intention to raise another $1 billion by selling stocks to buy Bitcoin.

Let’s take a look at how these courageous shorts fared.

Bitfinex margin shorts (blue) vs. Bitcoin price in USD (orange). Source: TradingView

On June 6, shorts increased from 1,380 to 6,700 at an average price of $36,150. Three days later, another 12,180 shorts were added when Bitcoin was trading at $37,050. Lastly, between June 14 and 15, shorts increased 6,000 to a 25,000 peak while Bitcoin averaged $40,100.

By looking at the Bitcoin prices when those short position increases took place, it is reasonable to assume that the 23,500 contract increase (green circles) had an average price of $37,625.

Related: Traders search for bearish signals after Bitcoin futures enter backwardation

Traders closed positions before BTC crashed bel$32,000

These short positions were steadily closed over the past three days when Bitcoin was already trading below $37,000. However, 17,000 short contracts had already been closed by the time the price plunged below $33,500. Therefore, it is implausible that the average price was below $34,500.

No one would complain about gaining 8%, shorting the market to generate a $73 million profit. However, it is essential to note that on June 16, when Bitcoin reached $40,400, these shorts were underwater by $65 million.

This analysis shows how even highly professional traders can go deep underwater. There’s no way to know if this trade would have been profitable had the crackdown on China not aggravated Bitcoin price or if MicroStrategy managed to raise the $1 billion before the price drop.

If anyone still believes in market manipulation, at least there’s comfort in knowing that pro traders can face drastic losses as well. However, unlike us mortals, whales have deep pockets and patience to withhold even the most rigorous thunderstorms.

The views and opinions expressed here are solely those of the author and do not necessarily reflect the views of Cointelegraph. Every investment and trading move involves risk. You should conduct your own research when making a decision.