Bitcoin (BTC) derivatives markets are showing increasing skepticism about the cryptocurrency's ability to maintain bullish momentum, even with the US Federal Reserve (Fed) adopting a more expansionist monetary policy. Traders are exhibiting caution due to macroeconomic uncertainties and Bitcoin's underperformance relative to gold.
The Fed's decision to maintain interest rates at 3.75% was largely anticipated. Federal Reserve Chair Jerome Powell expressed caution during the post-meeting press conference, citing ongoing risks related to labor market weakness and persistent inflation. Notably, two Fed members dissented, voting to keep rates at 4%, a divergence that is uncommon for the committee.
More significantly, the Fed announced its intention to purchase short-dated government bonds to "help manage liquidity levels." This initiative, starting with an initial $40 billion program, represents a notable reversal from the previous years of steady balance sheet reduction, which saw the Fed's holdings peak at $9 trillion in 2022 and currently stand at $6.6 trillion.
This injection of liquidity is expected to increase the amount of cash available for banks to lend, thereby supporting credit growth, stimulating business investment, and encouraging consumer borrowing during a period of slowing economic momentum.
Bitcoin Options Indicate a 70% Probability of BTC Remaining Below $100,000
The Bitcoin ($100,000) BTC call (buy) option suggests a 70% likelihood that the cryptocurrency will trade at or below $100,000 by January 30, according to the Black & Scholes model.
Purchasers of this option must pay an upfront premium of $3,440 to secure the right to buy Bitcoin at a fixed price of $100,000 on January 30. For context, this same call option was trading at $12,700 just one month prior. This instrument functions as a form of insurance and expires without value if Bitcoin closes below the strike price. However, the upside for the holder is unlimited if Bitcoin decisively surpasses $100,000.
The January options expiry for Bitcoin occurs two days after the next FOMC meeting on January 28. Data from the CME Group FedWatch Tool indicates that traders are assigning a 24% probability to another interest rate cut in January. Uncertainty has grown following the government funding shutdown in November, which has limited visibility into US employment and inflation data.
The stock market typically benefits from the Federal Reserve's expansionist policies due to anticipated lower capital costs and easier consumer financing. Bitcoin's reaction, however, is less predictable, as investors moving out of safe short-term government bonds may not view cryptocurrency as a reliable store of value.
On Wednesday, yields on the US 5-year Treasury were at 3.72%, a decrease from 4.10% six months prior, while the S&P 500 saw a 13% gain during the same period. Concerns persist among traders that the growth of US government debt could devalue the dollar and contribute to inflationary pressures, making the relative scarcity of equities more attractive despite worries about high valuations.
The catalysts for a significant Bitcoin rally remain unclear. However, the increasing cost of default protection within the artificial intelligence sector could potentially lead traders to reduce their exposure to stocks.
Currently, Bitcoin whales and market makers maintain a high degree of skepticism regarding a sustained upward movement beyond $100,000, despite the Fed's policy adjustments creating more favorable market conditions.