Mar 22, 2022 07:05
Ukraine, interest rates, inflation, and declining economic growth. The global economy has been shaken in recent weeks like it hasn't been in a long time. This resulted in the fourth-worst start to a stock market year. Most investors will have noticed that the depot is a bit like a roller coaster. Monday 4% up, Tuesday 6% down. The strong fluctuations currently dominating the market are called volatility. Investing in a volatile market can be difficult and nerve-wracking. In this article, we're going to introduce an indicator that crypto traders can use to their advantage, known as the "Fear Index". How to use VIX? Let's find out.
What is the VIX?
The Volatility Index, usually just called VIX for short, measures the fluctuation range of the US stock index S&P500. A high VIX value indicates a volatile market. Investing in high volatility means taking higher risks. The VIX is also called the "fear" index because you can use the index to quantify investors' fears. The higher the VIX, the higher the fear in the market.
Fig.1 S&P VIX 1-day chart showing the "Fear Index" -
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How to use VIX?
Here you can find the current price of the VIX. If you look at the index you will see that during events like the start of the COVID pandemic, the index was above 80 points. New corona waves such as Omicron can also be read from the index. The VIX shows you when the fear and, above all, the uncertainty of investors is at its highest. The VIX reached its last high on 03/07/2022, amid the Russian invasion of Ukraine. Since then, the VIX has fallen massively. In the past five days, the index lost almost 25%. This shows that the fear and uncertainty of investors are decreasing. An entry into the markets could currently be worthwhile.
Is VIX applicable to Cryptos?
Basically, the VIX is based on the US index S&P500, which lists the 500 largest US companies. Cryptocurrencies are therefore not represented in the index and therefore have no impact on the index. However, the past has shown that the prices of cryptocurrencies often correlate with the stock markets. So you can also use the VIX as a guide for crypto investments. To get an idea of ??whether the VIX is currently high or low, you can look at the average of the index. Logically, if the value is above average, the fear is comparatively high. If the value is lower, the fear in the historical price is comparatively low. If you are now investing in cryptos, but want to orientate yourself on the VIX, you want to note that the crypto courses usually fluctuate more than the stock markets.
Is trading VIX Good?
The VIX can only give you a limited view of market sentiment. The index cannot reflect unforeseeable future events, such as another COVID wave.
The VIX index is imposed by the Chicago Stock Exchange, you can even invest in the VIX through ETFs. Many investors use an investment in the VIX as a hedge for the S&P500.
How do I invest when there is high volatility?
In the event of high volatility, it is generally advisable to invest in tranches. So if you want to invest EUR 10,000, it makes sense to split it up into five tranches of EUR 2,000 each, for example. By doing this you will have a good cost-average effect. In addition, risky investments such as tech & growth stocks or cryptocurrencies fall significantly more than defensive investments such as gold, bonds, or conservative stocks in volatile markets.
Should I invest now in the market?
Using only the VIX as a basis for investing in the market, now could be a good time to enter. The VIX has been sharply declining since March 7th. The first signs have already appeared in the past few days, as the stock markets started a three-day rally. However, you should never just use the VIX as a guide when making investments, it only provides an overview.
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