Why The VIX Could Predict A Bitcoin And Crypto Rally

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Thomas Lee, managing partner and head of research at Fundstrat Global Advisors, outlined in a recent interview with CNBC why the VIX – a real-time volatility index from the Chicago Board Options Exchange (CBOE) – will become a key indicator for stock markets and potentially Bitcoin in the upcoming months.

VIX was created to quantify market expectations inconstancy for the S&P 500. In addition, the VIX is forward-looking, meaning it only shows implied volatility for the next 30 days. The rule of thumb is: if the VIX rises, the S&P 500 is likely to fall, and if the VIX value falls, the S&P 500 is likely to remain stable or rise.

Fundstrat analyst expects S&P 500 rally of 20% in 2023

Lee expects a 20% rally for the S&P 500 this year. Why? According to the chief analyst inflation surprised the Fed on the negative side last year. This year it will be the other way around. Inflation will fall faster than the Fed recently predicted.

This will have a decisive impact on the VIX, which will fall in value. “Bond market volatility is below 200 days [average]. If that happened to the VIX, we’d be at 17,” Lee claims, continuing that “since the 1950s, after a negative year, if the VIX is lower on average than the previous year, we’re up 22% on average. So I think we’re ready for a 20% year.

According to the Fundstrat analyst, Thursday will be significant. If core CPI is again below consensus, it means the original Fed forecast of 4.8% for PCE is 60 basis points too high.

“And that means that inflation is hugely below par. The bond market will prompt the Fed to say February could be the last rate hike and then rates will be cut,” Lee said.

What does this matter for Bitcoin?

For bitcoin, Thomas Lee’s prediction is interesting because the price was high correlation with the S&P 500 (with a higher beta) in the last year, unless there were crypto-intrinsic shocks like the collapse of FTX or Terra Luna. This meant that the bitcoin price behaved very similarly to the S&P 500, but was more volatile in both directions in response to changes in the market.

To that extent, the VIX (currently at 22) can also be used as a sentiment barometer for bitcoin. If Lee’s predicted drop in the VIX to 17 actually happens – either due to positive CPI data or a pivot from the US Federal Reserve – BTC could see a rally towards $20,000.

As recently as November, Lee said he was sticking to his $200,000 bitcoin price forecast even if the current market is negative. According to him, the BTC price will rise along with the S&P 500 if there are no more scams and bankruptcies of major players in the crypto industry.

At the time of writing, bitcoin price has been on a slight upward trend over the past week, trading at $17,296.

BitcoinBTC/USD
Bitcoin grinding, 1-day char | Source: BTCUSD on TradingView.com

Featured image of Art Rachen / Unsplash, chart from TradingView.com

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