Fed Signals Sharp Rate Hike Due To Inflation In March — Here’s How Bitcoin Traders Can Prepare

Like it or not, for crypto investors, the US Federal Reserve’s policy on rate hikes and high inflation is the most relevant metric to gauge demand for risky assets. By raising the cost of capital, the Fed increases the profitability of fixed income instruments, but this hurts the stock market, real estate, commodities and cryptocurrencies.

A positive aspect of the Fed’s meetings is that they are scheduled well in advance so that Bitcoin (BTC) traders can prepare for them. Federal Reserve policy decisions have historically caused extreme intraday volatility in risky assets, but traders can use derivatives to get optimal results when the Fed adjusts interest rates.

Another challenge for traders is that they are under pressure because Bitcoin is highly correlated with stocks. For example, the 50-day correlation coefficient versus the S&P 500 futures has been running above 70% since Feb. 7. While it does not state cause and effect, it is clear that cryptocurrency investors are waiting for the direction of traditional markets.

It is also possible that Bitcoin’s low emissions could prove to be an asset as investors realize that the FED is running out of options to curb inflation. Raising interest rates even further could cause US government loan payments to spiral out of control and eventually exceed $1 trillion a year. This creates a huge stimulus for Bitcoin bulls, but extreme caution is advised by those willing to trade based on rate hikes.

Risk takers may benefit from buying Bitcoin futures contracts to leverage their positions, but they may also be liquidated if there is a sudden negative price move ahead of the FED’s decision on March 22. For this reason, professional traders are more likely to opt for options trading. strategies such as the leaning iron condor.

A balanced risk approach to using call options

By trading multiple call (buy) options for the same expiration date, traders can earn profits that are 3 times higher than the potential loss. This options strategy allows a trader to capitalize on the upside while limiting losses.

It is important to remember that all options have a fixed expiration date, so the price increase of Bitcoin must occur within the stipulated period.

Below are the expected returns using Bitcoin options for the March 31 expiration date, but this methodology can also be applied to different time frames. While costs vary, overall efficiency is not affected.

Profit / Loss estimation. Source: Deribit Position Builder

The call option gives the buyer the right to acquire an asset, but the contract seller gets (potentially) negative exposure. The iron condor consists of selling the call and put options at the same expiration price and date.

As shown above, the target profit area is above $23,800, and the worst-case scenario is a 0.217 BTC (or $5,156 at current prices) if the expiry price falls below $23,000 on March 31.

Related: Bitcoin price enters ‘transition phase’ according to BTC on-chain analysis

To initiate the trade, the investor must purchase 6.2 contracts of the $23,000 put (sell) option. Next, the buyer must sell 2.1 contracts of the $25,000 call option and another 2.2 contracts of the $27,000 call option. Next, the investor must sell 3.5 contracts of the $25,000 put (sell) option in combination with 2 contracts of the $27,000 put option.

As a final step, the trader must buy 3.9 contracts of the $29,000 call option to limit losses above the level.

This strategy will pay off if Bitcoin trades between $23,800 and $29,000 on March 31. Net profit peaks at 0.276 BTC ($6,558 at current prices) between $25,000 and $27,000, but remains above 0.135 BTC ($3,297 at current prices) as Bitcoin trades in the $24,400 and $27,950 range.

The investment required to open this lopsided iron condor strategy is the maximum loss, so 0.217 BTC or $5,156, which will happen if Bitcoin trades below $23,000 on March 31. The advantage of this strategy is the broad profit target area, which provides better risk. result than trading leveraged futures, especially given the limited downside.