Bitcoin traded higher on the day that Jerome Powell, Chairman of the U.S. Federal Reserve, indicated that he is ready to increase interest rates aggressively. At press time, the most popular cryptocurrency traded for $42,700. This is a gain of approximately 4%. The drop to $41,000 following Powell’s comments was temporary and prices rose to $43,350 today. Futures linked to the S&P 500 point to a gain of 0.32%. The index was unchanged Monday.
In a speech to the National Association of Business Economics, Powell stated that “We will take all necessary steps to ensure price stability.” “In particular, if it seems appropriate to act more aggressively in raising the federal funds’ rates by more than a quarter-point at a meeting or meetings, then we will.”
Powell offered a 50-basis point increase for the upcoming months after rising by 25 basis points last Wednesday and signaling 175 basis points of increases throughout the year.
The resilience of risk assets may be due to investors’ tendency towards being forward-looking and the fact the Fed tightening has already been baked in. Let’s examine each of these factors in greater detail.
Fed tightening is priced
Markets were first frightened by Fed tightening in November. Rate traders have changed their pricing strategy from pricing in three increases for this year to seven, 25-basis-point increases.
Markets predicted that the Fed would raise rates 50 basis points in March, even before Russia invaded Ukraine. Now traders anticipate a 50 basis-point increase in the Fed’s rates in May. Bitcoin has fallen 38% since mid-November.
So Powell’s suggestion of rate increases is not surprising. Powell’s remarks on Monday and last week’s Fed meeting that was hawkish confirmed investor expectations, and seem to have removed significant uncertainty from the market.
“Investors don’t like uncertainty as much as they hate bad outcomes,” Jeff Dorman, CIO at digital asset management firm Arca, stated. In a Monday blog post, Jeff Dorman, CIO of digital asset management company Arca, stated that markets are exactly at their current position.
“The storm that was before the calm” had been in the making, but it seems like it has passed. Markets are forward-looking, and investors have long memories. Investors had already predicted a 3-year tightening cycle well before it began. There is much more to the world than that. It’s a good thing. Dorman wrote.
Forward-looking markets might be focused on the possibility of a recession or the Fed returning to an expansionary monetary policy in order to support the economy. The Fed Funds futures indicate that interest-rate derivatives traders have priced in a rate reduction as soon as 2023.
The U.S. Treasury yield curve (the spread between 10-year and two-year yields) is only 17 basis points away from inversion, a recession indicator. Inversion is when the yield on the two-year bond rises above that of the 10-year bond.
“The inversion signal to investors that Fed may compromise in future, so it is a good sign in part,” Griffin Ardern (a volatility trader at crypto-asset management firm Blofin) said in Telegram.
The Fed cannot reverse its quantitative easing policy if the economy is in serious trouble. Ardern stated that the Fed can only support its hawkish policy based on the current macro data. However, the maximum period of time will not exceed two years.
Ardern says that the best time to purchase the dip in risk assets is when the Treasury curve turns to the maximum.
Pre-options expiry bump
Bitcoin’s tendency toward the “max pain point” – strike price at which most options contracts cease to be worthless – could help the cryptocurrency maintain its grounding in the wake of Powell’s comments.
Ardern observed that “when the quarterly delivery is near, in the event of large transactions, the actual price will tend t come to the maximum pain point and be firmly anchor,” Ardern said. “A similar situation occurred once last December 31.”
Skew data shows that option contracts worth $3.56 trillion are due to expire on Friday. The maximum pain is $41,000 according to data sourced by Deribit, which is the largest cryptocurrency options exchange in terms of trading volumes and open positions.
The theory is that the max pain point attracts spot prices as expiration approaches. This is because option sellers, mostly institutional, may try to push prices closer towards the max pain point in order to inflict maximum losses on options buyers.
Bitcoin has experienced increased volatility since early 2021 ahead of quarterly option expiries. Prices have pulled back or bounced to the maximum pain point in the run up to settlement, only for prices to resume their previous trend after expiry.