After the hawkish stance taken by the Federal Reserve, short-term Bitcoin put options have seen increased demand, reflecting a shift in sentiment towards risk assets.
Crypto traders’ concerns about the Fed’s hawkish tone came to fruition on Wednesday. Although Chairman Jerome Powell lowered interest rates, he expressed uncertainty about the pace and scale of future rate cuts. This has led to a significant deterioration in market sentiment.
Data from Amberdata shows that Bitcoin’s seven-day call-put skew is now at its highest implied volatility premium for puts relative to calls since September. Specifically, Deribit-listed put options with downside protection, set to expire in one week, are now the most expensive compared to call options in the last three months. This indicates that traders are scrambling to hedge their bullish positions against a potential continuation of the price drop triggered by the Fed’s cautious outlook.
The bearish sentiment is also apparent in the one-month skew, which reflects a preference for puts over calls. The difference in volatility premiums for options with expiration dates between two to six months has also shrunk, with calls trading at a 3 volatility point premium over puts, down from a 4-5 volatility point premium earlier this month.
On Wednesday, the Fed reduced its benchmark interest rate by 25 basis points to the 4.25%–4.5% range, marking a total of 100 basis points in cuts since the easing cycle began in September. Despite the rate reduction, Bitcoin’s price fell as Powell noted that the decision was a “close call” and stressed caution about future rate cuts, especially as rates near a neutral level. Powell also clarified that the Fed had no plans to participate in any U.S. government proposal to create a strategic Bitcoin reserve, responding to President-elect Trump’s suggestion of establishing a BTC reserve akin to the country’s oil stockpile.
Additionally, the Fed’s dot plot, which illustrates where committee members project the fed funds rate will be in the future, indicated only two rate cuts in 2025. This was fewer than the three cuts anticipated and down from the four cuts projected in September. The less dovish outlook in the dot plot led to a sell-off in risk assets, with the Dow Jones falling over 1,000 points, or 2.5%. Bitcoin also saw a drop, falling from around $105,000 to under $99,000, according to data from TradingView and CoinDesk.
As of now, Bitcoin is attempting a recovery, trading at approximately $101,200 after overnight losses.
The strength of the U.S. dollar is also contributing to the pressure on risk assets. The dollar index remains elevated, holding steady near 108, its highest level since October 2022, which could further dampen the outlook for riskier investments like Bitcoin.
