Fed Preview: Bitcoin Market Skews Bearish as Analysts Anticipate 'Hawkish Rate-Hike Pause'

The options market shows a bias for puts tied to bitcoin ahead of the pivotal Fed meeting.

AccessTimeIconJun 14, 2023 at 9:41 a.m. UTC
Updated Jun 14, 2023 at 2:33 p.m. UTC

Bitcoin (BTC) traders are taking a defensive stance ahead of Wednesday's U.S. Federal Reserve meeting, with the central bank seen likely to leave interest rates unchanged while keeping the door open for future increases in a move some observers described as a "hawkish pause."

The Federal Open Market Committee (FOMC) is set to announce the interest rate decision on Wednesday at 2 p.m. ET (18:00 UTC). Half an hour later, Chair Jerome Powell will speak at a press conference.

Fed fund futures show interest-rate traders expect the central bank to hold the benchmark borrowing cost steady in the 5%-5.25% range, having raised by 500 basis points (5 percentage points) since March 2022. The steep rate-increase cycle, coupled with the balance sheet shrinkage, destabilized risk assets, including cryptocurrencies, last year.

The central bank, however, is expected to indicate a potential for continued tightening over the coming months. At press time, Fed funds futures showed just over a 50% probability of the Fed raising rates by another 25 basis points in July. Implied rate cuts from the year-end have been priced out of the forward rates curve.

Puts – or bearish bets – tied to bitcoin are trading pricier than bullish calls heading into the Fed meeting, according to options risk reversals data tracked by Singapore-based crypto trading giant QCP Capital. The put bias shows a nervous mood in the market.

"For the FOMC meeting, we think the risk is that they do a 'hawkish skip' – implying they pause at this meeting, but raise their median dot [interest rate] projection to show a continued hiking bias to appease the committee hawks," QCP Capital's market insights team said in an update published Tuesday, adding that "risk-reward balance this week favors being long BTC and ether puts."

The U.S. headline consumer price index (CPI) slipped to a two-year low of 4% in May, falling below the current Fed funds rate. That has created room for the Fed to hold rates steady at Wednesday's meeting, according to QCP.

However, both headline CPI and the Fed's preferred inflation measure, the core PCE at 4.7%, remain well above the central bank's long-held target of 2%, leaving the Fed less room to end the tightening cycle.

Besides, positive inflation-adjusted interest rates, also known as real rates, often weigh over zero-yielding assets like gold and bitcoin.

"Positive real rates generally are bad for zero-yielding assets, and generally, BTC has been negatively correlated with real yields," QCP added.

Risk reversals track the spread between implied volatility premium of cheap out-of-the-money calls and puts. A negative spread indicates bias for put options. (QCP Capital)
Risk reversals track the spread between implied volatility premium of cheap out-of-the-money calls and puts. A negative spread indicates bias for put options. (QCP Capital) (QCP Capital)

Historically, some crypto traders have looked to post-Fed moves in the U.S. stock markets to decide on their plans. That strategy may not work this time, given the recent weakening of the correlation between bitcoin and the S&P 500 and Nasdaq equity indexes.

"A Fed rate hike skip is likely to be celebrated by equity bulls who have already helped fuel the S&P 500 to new yearly highs," Joshua Olszewicz, the head of research at alternative asset management firm Valkyrie Investment, said in a weekly market review published Monday. "Bitcoin and Ethereum have not benefited from a risk-on-equity environment over the past few weeks, potentially hinting at the unease regarding pending regulatory actions."

According to David Brickell, director of institutional sales at crypto liquidity network Paradigm, the consensus for a hawkish skip means Powell may struggle to out-hawk the market, allowing a recovery in risk assets.

"The consensus is for the hawkish skip, so the bar might be quite high for Jerome Powell to out-hawk the market," Brickell told CoinDesk. From a communication perspective, I think it’s difficult to sound too hawkish when you’re taking a pause, so my bias would be that it’s interpreted as more dovish relative to expectations Rates [yields] then, I think, drift lower and BTC rallies, but I’m not expecting it to trigger a big move."

Bitcoin traded little changed near $25,940 at press time, CoinDesk data show .

Edited by Sheldon Reback.


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Omkar Godbole

Omkar Godbole is a Co-Managing Editor on CoinDesk's Markets team.

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