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Fed Rate Decision Today Impact on Bitcoin Explained as BTC Options Expire Friday

Published September 20, 2023 10:31 AM
Teuta Franjkovic
Published September 20, 2023 10:31 AM

Key Takeaways

  • Fed is likely to maintain its data-dependent posture on Wednesday and provide the market with few surprises.
  • The recent Bitcoin options’ expiry suggests the currency may remain within a 3% range post-Fed decision.
  • Interest in Bitcoin futures has steadily increased to $3.3 billion in only three days.

The level of price volatility in Bitcoin (BTC) continues to be muted, which is consistent with the Fed rate expectations and the lack of turmoil in the American stock and bond markets.

Some cryptocurrency traders predict that the low volatility regime will continue following the Federal Reserve’s (Fed) rate decision  on Wednesday.

The Fed will release a statement, the Summary of Economic Projections, and a fresh “dot plot” of interest-rate forecasts along with the rate decision on Wednesday at 14:00 ET. 30 minutes later, Fed’s chair Jerome Powell will hold a press conference.

The price of Bitcoin  decreased by less than 1% to around $26,998, still trading close to its highest level so far in September. With volumes and volatility at historically low levels, the largest digital asset has, for now, moved outside of the $26,000 range that has dominated trade for the previous month.

Maintaining Rates Amid Data-Dependent Approach

Since March 2022, the central bank has increased interest rates by 525 basis points in an effort to control inflation. The early stages of the so-called tightening cycle have caused volatility in the traditional and crypto markets, which are dependent on liquidity.

According to Greg Magadini , director of derivatives at Amberdata, the central bank is expected to keep the benchmark borrowing cost steady between 5.25% and 5.5% on Wednesday, sticking to its well-known data-dependent approach. Rates traders also anticipate that the Fed will likely maintain rates unchanged on Wednesday, with a high probability.

“The Fed has been certain that it would continue to be ‘data reliant’ and that it will be able to ‘keep rates higher for longer. Greg Magadini, director of derivatives at Amberdata, wrote  to customers on Monday, “To me, this indicates the Fed can manage this week’s FOMC meeting by keeping rates constant, but signaling rates will remain elevated as they monitor economic reports.

According to Magadini, “This would turn the FOMC [Fed] meeting into a low volatility event.”

Facing Inflation and Rate Hike Uncertainty

The Federal Reserve has consistently refused to declare an end to the cycle of rate hikes that started in March of last year, insisting that the future course of action with regard to interest rates depends on how inflation and employment develop.

On Wednesday, September 20, 2023, with inflation projected to pick up, analysts expect the Fed to reiterate its position.

Additionally, if the Fed indicates an end to the tightening cycle, markets, which have grown accustomed to swift rate drops over the previous four decades, may swiftly price in renewed liquidity easing, complicating matters for the central bank.
In other words, the likelihood of a surprise from the central bank favouring the current low volatility regime in traditional markets and bitcoin is low.

We don’t think it [volatility] will come from this Fed directly, according  to Singapore-based cryptocurrency trading company QCP Capital.

“We anticipate the FOMC’s desire to raise again being extremely low heading into the remaining three meetings of the year. At the same time, given the rising pump prices and rising inflation, we do not see how Powell can confidently declare an end to this hiking cycle,” the company stated .

“With [Fed Chairman Jerome] Powell likely to attempt his best volatility-killing fuzzy guidance yet again, it is unlikely that the current market pricing of a half-hike this year followed by three cuts next year will shift much,” QCP continued .

Rate Moves Unsure

These rate decisions may not occur, according to expiring Bitcoin options that cover the Fed and Bank of Japan (BOJ) meetings on Friday.

Options are a type of derivative contract that grant the buyer the option, but not the obligation, to buy or sell the underlying asset at a fixed price at a later time. Currency traders frequently use options to estimate possible post-event volatility in the underlying asset.

Markus Thielen, head of research and strategy at cryptocurrency services provider Matrixport, stated: “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.”

A Tipping Point for Bitcoin Volatility

Regardless, analysts anticipate the central bank will keep interest rates stable in the near term, although uncertainty remains about its stance in November concerning potential rate hikes and their potential impact on inflation.

Bitcoin, which has been influenced by the tightening monetary policy of the Fed, may be affected as higher returns on low-risk assets often reduce demand for riskier investments like cryptocurrencies.

The upcoming Fed decision has the potential to trigger increased market volatility. Many traders have taken substantial bullish positions in Bitcoin within the highly leveraged perpetual futures market, a cornerstone of the crypto ecosystem.

The total open interest in Bitcoin futures on Binance , the world’s largest crypto futures market, has steadily risen to $3.3 billion in only three days, indicating a strong bias toward bullish bets.

Considering the substantial leverage inherent in these positions, a hawkish Fed stance could make traders apprehensive, possibly triggering a rapid sell-off and causing Bitcoin prices to plummet as leveraged positions face liquidation.

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