Crypto Traders’ Initial Worries About a Hawkish Fed Materialize
The Sentiment Has Deteriorated
Crypto traders initially worried about a hawkish Fed, and those concerns have now materialized. The market’s response to the recent rate cut has been less than expected, with Bitcoin’s seven-day call-put skew showing that Deribit-listed put options offering downside protection and expiring in one week are trading at the highest implied volatility premium to call options since September, according to data source Amberdata. This indicates that traders are scrambling to hedge their bullish bets against a potential continuation of the price slide, triggered by a hawkish Fed.
A Sign of Traders’ Scrambled Bets
The dour sentiment is also evident from the negative one-month skew, reflecting a bias for puts and a significantly weaker call bias in options ranging from two to six months. These calls traded at a 3 vol premium to puts at press time, down from the 4-5 vol premium observed early this month. This suggests that traders are increasingly wary of a potential downturn in the market.
The Fed’s Rate Cut and Its Impact on Crypto
On Wednesday, the Fed cut the benchmark interest rate by 25 basis points to the 4.25% to 4.5% range. This is 100 basis points lower than the September levels when it began the easing cycle. However, the market’s response to the rate cut was less than expected, with Bitcoin declining following the announcement. Fed Chairman Jerome Powell described the rate cut as a “closer call” and emphasized caution regarding future moves as rates approach the neutral level.
Powell’s Comments on the Future of Interest Rates
Powell also stated that the Fed has no intention of participating in any government plan to create a strategic bitcoin reserve, adding that board members do not intend to push for changes to the Fed law. This comes after President-elect Trump’s recent mention that his administration would consider establishing a BTC reserve similar to the country’s oil stockpile.
The Dot Plot Signals a More Hawkish Outlook
The dot plot, an anonymous graphical representation of where the 19 committee members project the fed funds rates will be in the future, signaled only two rate cuts in 2025 instead of three expected and down from four in September. This more hawkish outlook has sent risk assets lower, with the Dow Jones ending down 2.5% or over 1,000 points, and BTC slipping from roughly $105,000 to under $99,000, according to data sources TradingView and CoinDesk.
Consequences for the Market
As of this writing, BTC is trading at around $101,200, aiming to recover from overnight losses. Meanwhile, the dollar index, which gauges the greenback’s value against major currencies, continues to hold on to its overnight gains, holding steady near 108, the highest level since October 2022. A persistent strength in the USD could add to risk assets’ woes.
Conclusion
The recent rate cut by the Fed has sparked concerns about the future of interest rates and the potential impact on the crypto market. The market’s response to the rate cut has been less than expected, with traders scrambling to hedge their bets against a potential downturn. The dot plot’s more hawkish outlook has also contributed to the decline in risk assets. As the market continues to evolve, it is essential for investors to stay informed about the latest developments and adjust their strategies accordingly.
FAQs
Q: What is the current state of the crypto market?
A: The crypto market is currently experiencing a decline, with Bitcoin trading at around $101,200.
Q: What is the reason for the decline?
A: The decline is attributed to the recent rate cut by the Fed, which has sparked concerns about the future of interest rates and the potential impact on the crypto market.
Q: What is the dot plot, and how does it affect the market?
A: The dot plot is an anonymous graphical representation of where the 19 committee members project the fed funds rates will be in the future. It signaled a more hawkish outlook, which has contributed to the decline in risk assets.
Q: What is the current state of the dollar index?
A: The dollar index is currently holding steady near 108, the highest level since October 2022.
Q: What is the potential impact of a persistent strength in the USD on risk assets?
A: A persistent strength in the USD could add to risk assets’ woes, contributing to a further decline in the market.
