Bitcoin vs VIX: Using Crypto as an Early Signal for Risk Appetite

Bitcoin and Risk Appetite

• The inverse relationship between bitcoin and the VIX, while modest, reinforces bitcoin’s role as a risk-on asset rather than a hedge.
• Bitcoin is acting as an early warning signal for shifts in risk appetite, often weakening before volatility spikes.
• Recent bitcoin weakness supports a cautious equity outlook, shaping a trading approach that prioritizes risk management over upside chasing.

Being down three out of my four limbs, the past couple months has been dangerous. Not in terms of my physical safety (how much more can I really lose), but the time it's giving me to play around with AI a bit and do some research. My trading thesis is pretty straight-forward in that I think the recent selloff in bitcoin is a sign investors have become cautious on equities. That is the basis for the trades I've been making recently, and I'll update you on those as well. Behold my latest creation in the chart below. As I mentioned last week, one of the key items I'm watching is risk-appetite. Specifically, I'm keying in on the relationship between bitcoin and other asset classes. This chart shows a normalized relationship between bitcoin and the VIX going back the last few years (thank you, ChatGPT). When I look at this chart, I see drops in bitcoin that slightly precede spikes in VIX. I believe that is telling because it reinforces the idea that bitcoin is in fact a decent gauge of risk appetite. There is a slight daily inverse correlation of -0.16 between bitcoin and VIX, which makes sense to me; when bitcoin falls, VIX moves up.

I also ran a similar chart comparing bitcoin with the S&P 500 (I was on a roll). Again, you can see that drops in bitcoin happen just before dips in equity prices. The daily correlation here is 0.14. I may not be breaking new ground, but I am trying to create for myself and my style of trading, a roadmap and the landmarks, if you will, that I’m looking for.

The products which I tend to trade most often are in the futures and, as I’ve talked about before, I’m a directional trader. Yes, I also do sell premium and do traditional “tasty” style trading as well. However, I spend a lot of time scalping intraday. I’m writing this midday on Tuesday and right now, I’m short /MES, but half my normal size. With bitcoin rallying, I’m not in a rush to add to the position. I’m also long gold via /MGC with a half position. My thought is that the gold to silver ratio is still stretched, but I am not a huge pairs trading person, so I’m simply long gold. I’ve also picked up some long oil with /MCL. At $55, we are either headed into a recession, or this is a temporary dip. At these levels, I simply like the pot odds, and I’m taking a small shot. I have a position that is three-quarters my normal size. Directional trading isn’t for everyone and I have no statistical advantage with these trades. However, I like being engaged. I like having active positions like these because they factor into how I select my short premium plays. It puts me in a mindset that works for me and as a trader, we all need to find what works best for us, individually.
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Bitcoin vs VIX: Using Crypto as an Early Signal for Risk Appetite

Bitcoin and Risk Appetite

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