The world of Bitcoin is always buzzing with anticipation, and this week is no exception.
On Wednesday, at 14:00 ET, the Federal Reserve (FED) is set to unveil its latest rate decision, an event that could potentially send shockwaves through the financial markets.
But, interestingly, when it comes to Bitcoin price volatility, the forecast isn’t all that turbulent.
In fact, the way Bitcoin options are currently priced suggests that the cryptocurrency may not experience a move greater than 3% by Friday.
Intriguing, isn’t it?
Let’s delve deeper into this fascinating convergence of financial events and explore why Bitcoin price volatility seems to be in a state of hibernation.
The Calm Before the Storm
Volatility, often defined as the degree of price turbulence, has been quite subdued in the world of Bitcoin.
This tranquility mirrors the relative calm in the U.S. stock and bond markets.
Interestingly, this period of low volatility is expected to persist even after the Federal Reserve’s rate decision, according to some astute crypto traders.
For those unfamiliar with the term, the Federal Reserve, often referred to as the Fed, is the central banking system of the United States.
It plays a pivotal role in influencing economic conditions through its control over interest rates and money supply.
So, when the Fed speaks, markets listen.
The Fed’s Rate Decision
On Wednesday, the Federal Reserve is scheduled to announce its rate decision, accompanied by a statement, the Summary of Economic Projections, and a new “dot plot” of interest-rate estimates.
Federal Reserve Chairman Jerome Powell will then follow with a press conference thirty minutes later.
This event holds immense significance for financial markets, as the Fed has already increased rates by 525 basis points since March 2022.
This initial phase of the so-called tightening cycle injected a dose of volatility into both the crypto and traditional markets, which had become somewhat addicted to the liquidity provided by low-interest rates.
However, the prevailing expectation is that the central bank will opt to maintain the benchmark borrowing cost within the range of 5.25% to 5.5%.
Furthermore, the Fed is likely to uphold its long-standing data-dependent stance, refraining from delivering any surprises to the market.
According to Greg Magadini, director of derivatives at Amberdata, rates traders are nearly certain that the Fed will keep rates steady on Wednesday.
Staying ‘Data Dependent’
“The Fed has been very adamant about remaining ‘data dependent’ and signaling the ability to ‘hold rates higher for longer’. To me, this means the Fed can navigate this week’s FOMC meeting by keeping rates unchanged, but signaling rates will remain elevated while they monitor economic releases,”
Greg Magadini notes in a recent communication to clients.
Magadini’s analysis leads him to believe that this upcoming Federal Open Market Committee (FOMC) meeting is likely to be a low volatility event.
This prediction aligns with the Fed’s consistent stance of adjusting interest rates based on evolving inflation and employment metrics.
They’ve consistently refrained from signaling a definitive end to the rate hike cycle that commenced in March of the previous year.
Inflation and the Fed’s Dilemma
The Fed’s hesitance to signal an end to the tightening cycle is closely linked to the evolving inflation landscape.
As inflation shows signs of rebounding, the central bank faces a delicate balancing act.
Additionally, markets have become accustomed to rapid rate cuts over the past four decades, and any hints of renewed liquidity easing could complicate matters for the Fed.
In other words, the probability of the central bank delivering a hawkish or dovish surprise appears to be quite low.
This scenario favors the current low volatility environment not only in Bitcoin but also in the traditional financial markets.
“We doubt it [volatility] will come from this Fed itself,” says Singapore-based crypto trading firm QCP Capital. “Into the final three meetings of the year, we expect the appetite within the FOMC to hike again is extremely low. At the same time, we do not see how Powell can assuredly call an end to this hiking cycle, given the surging pump prices and rebounding inflation.”
QCP Capital’s view underscores the prevailing sentiment that Chairman Jerome Powell is likely to offer guidance designed to minimize volatility, as he has done in the past.
Consequently, current market pricing, which suggests a scenario of half a hike this year followed by three cuts next year, is unlikely to shift significantly.
Bitcoin Options Point to Calm Waters
Interestingly, Bitcoin options set to expire this Friday, capturing the Federal Reserve and Bank of Japan (BOJ) meetings, indicate that these rate decisions might turn out to be non-events for the cryptocurrency.
Options, for those unfamiliar with them, are derivative contracts that grant the holder the right (but not the obligation) to buy or sell the underlying asset at a predetermined price on a specified future date.
Traders often turn to options to gauge the potential post-event volatility in the underlying asset.
Based on Bitcoin options market pricing, traders expect that BTC will only move by 2.8% this Friday, a sign that nobody expects any market-moving comments from Chairman Powell,” explains Markus Thielen, head of research and strategy at crypto services provider Matrixport.
To put things into perspective, in 2023, Bitcoin has only witnessed a modest rally of +1% shortly after previous FOMC meetings, followed by a slightly more substantial increase of +3% one week later.
These statistics provide valuable insights into market expectations and indicate a certain degree of resilience in Bitcoin’s price, even in the face of significant financial events.
In conclusion, the upcoming Federal Reserve rate decision, coupled with the prevailing conditions in Bitcoin’s options market, paints an intriguing picture.
While the financial world awaits the Fed’s announcement with bated breath, Bitcoin appears to be in a state of relative calm.
The data and market sentiment align to suggest that the cryptocurrency may not experience drastic price swings in the immediate aftermath of the decision.
This could be seen as a testament to the growing maturity of the cryptocurrency market.
It signifies that Bitcoin is gradually finding its place as a financial asset that can withstand external shocks and uncertainties.
However, as always in the world of finance, surprises are never entirely ruled out.
Market dynamics can shift swiftly, and unforeseen events can lead to sudden changes in sentiment.
As the world watches the Fed’s actions closely, crypto enthusiasts and traders will continue to monitor Bitcoin’s price movements with keen interest.
Whether the cryptocurrency maintains its current composure or springs a surprise of its own remains to be seen.
In the world of finance, one thing is certain: volatility may ebb and flow, but it never truly disappears.