Bitcoin is holding in a tight range as investors' focus turns to the U.S. Federal Reserve's monetary policy statement on Wednesday, which could offer clues on the central bank's course of action and inject volatility into financial markets.
The cryptocurrency has been trading in a narrow range of $39,400 to $41,300 since Monday's European trading hours, CoinDesk 20 data show.
"The market is completely neutral ahead of the Fed with only a little spot buying," Brian Tehako, chief investment officer at Warwick Capital Management, said. "Traders are waiting for the Fed announcement."
The event is likely to have a binary market reaction, according to Singapore-based QCP Capital. Binary events are dramatic developments that trigger big moves in either direction.
"If the Fed remains dovish [retains pro-stimulus bias], cryptocurrencies would have the most upside potential until September at least, given the overselling we've seen relative to other macro markets since May's CPI print," QCP Capital noted in its Telegram channel.
Bitcoin tanked from $58,000 to nearly $30,000 in the eight days to May 19. The sell-off began after official data released on May 12 showed the U.S. consumer price index surged to its highest level in almost three years. That renewed fears that Fed would begin to gradually unwind liquidity-boosting stimulus earlier than expected.
However, while bitcoin dropped in the wake of Fed tightening fears, traditional markets remained resilient, with gold ending May with a 7.8% gain and stocks staying strong.
That's left bitcoin and cryptocurrencies in general looking relatively cheap heading into the Fed's statement, and so they could benefit the most on the back of a dovish outcome.
On the flip side, a hawkish surprise could weigh on asset prices. "If they're hawkish on Wednesday, then all bets are off, and we would expect the [crypto] market to revisit recent lows," QCP Capital said.
According to Patrick Heusser, the head of trading at Zurich-based Crypto Broker AG, the pain trade could be a "risk-off" reaction, resulting in an uptick in safe-haven currencies like the franc, yen and U.S. dollar, and a sell-off in commodities and equities. "The risk-off could also bring losses for bitcoin," Heusser said.
The crypto market appears to be in position for a surge in volatility post-Fed. "The crypto market looks to be long gamma heading into the event," Denis Vinokourov, head of research at Synergia Capital, told CoinDesk.
Gamma refers to the speed of change in the option's delta – the sensitivity of the option's price to changes in the price of the underlying asset. That is, gamma measures the rate of change in the option’s price relative to changes in the spot market prices.
Being long gamma means holding an options position with net gamma greater than zero. In plain English, the position will benefit from a pick up in price volatility of the underlying asset.