Weekly Commentary: Volrelation

The correlation of changes in BTC spot price to those of US equity indices has fallen since February of this year to a near-zero statistical relationship. Whilst both have retraced significant losses sustained in 2022, BTC’s has recorded its strong YTD performance of +86% independently of movements in the both the S&P 500 and the Nasdaq 100 indices. We also observe a fall in the correlation between changes in the implied volatility of BTC and ETH as measured by our own implied volatility index, the BSIV. This index shows little correlation between the volatility implied by options on BTC and the S&P 500, despite a strong historical relationship between their spot prices.

Spot Price Correlations

Figure 1 Rolling 90-day correlation of BTC’s spot price with ETH (purple), bonds (AGG, blue), gold (GLD, yellow), the dollar (DXY, green) the S&P 500 (SPX, red) and the Nasdaq 100 (NDX, black) since January 2021. Source: Yahoo Finance, Block Scholes

• BTC’s correlation to equities, measured against both the S&P 500 and the tech-heavy Nasdaq 100, has been falling since early February this year.
• It is now at the lowest level observed since July 2021, when BTC was between its twin peaks in April and November.
• The fall in correlation has happened as both assets have retraced losses sustained throughout last year’s tightening cycle.
• However, BTC and ETH reported the highest returns YTD of all benchmarks consider returns YTD, at 86.2% and 62.6% respectively – with the NDX at “just” +39%.

Block Scholes Implied Volatility Index

Figure 2 Daily BSIV (Block Scholes Implied Volatility) index of BTC (orange) and ETH (purple) options at a 1-month tenor alongside the VIX (red). Source: Yahoo Finance, Block Scholes

• Despite their market-dominating returns, the implied volatilities of BTC and ETH options has been trading near to the lower bound of their historic ranges.
• The VIX, which measures the implied volatility of 1-month options on the S&P 500, is similarly pricing for near all time lows.

Correlation of Vols

Figure 3 Rolling 90-day correlation of BTC’s 1-month implied volatility index (BSIV) with ETH’s 1-month implied volatility index (purple) and the VIX (red). Source: Yahoo Finance (VIX), Block Scholes (BSIV)

• Whilst their spot prices moved together for significant historical periods, expectations about future volatility of BTC and US equities asset have held little statistical relationship.
• In contrast, we have seen fears of selloffs in ETH rise at the same time as fears about BTC selloffs, such as during the FTX collapse in November 2022.
• However, at the same time as the beginning of the decoupling between BTC and equities in early 2023 (see Figure 2), we also see a reduction in the correlation between changes in BTC vol and those of ETH vol.