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Hawkish Fed Drives Bitcoin Market to Highest Level of Fear in Three Months

Hawkish Fed Drives Bitcoin Market to Highest Level of Fear in Three Months
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  • PublishedDecember 19, 2024

Bitcoin (BTC) traders are expressing heightened concern following the US Federal Reserve’s recent decision to adopt a hawkish stance, dampening bullish sentiment in risk assets, CoinDesk reports.

As a result, demand for short-term BTC put options has surged, with market participants seeking downside protection amid uncertainty over the Fed’s future moves.

The seven-day Bitcoin put options, which provide protection against price drops, are trading at the highest volatility premium to call options since September, according to data from Amberdata. This indicates that traders are increasingly worried about a potential decline in Bitcoin’s price after the Fed’s cautious stance on future interest rate cuts.

The Federal Reserve’s decision on Wednesday to cut interest rates by 25 basis points, bringing the benchmark rate to 4.25% to 4.5%, was expected by the market. However, Fed Chairman Jerome Powell’s comments dampened optimism as he highlighted uncertainty about the pace and extent of future easing. This, coupled with the Fed’s updated dot plot, which now projects only two rate cuts in 2025, rather than the four anticipated in September, has triggered a negative shift in sentiment for both Bitcoin and other risk assets.

The market’s fear is evident in the significant change in Bitcoin’s options market. The one-month skew, which reflects the relative demand for put versus call options, has become increasingly negative. In other words, there is a growing bias towards puts, signaling that traders are hedging against further price declines in the coming months. Additionally, the call skew for longer-duration options (spanning from two to six months) has weakened, reflecting a shift in sentiment away from bullish expectations.

Following the Fed’s announcement, Bitcoin saw a sharp decline, falling from around $105,000 to below $99,000. As of the latest data, Bitcoin is attempting to recover, trading near $101,200. The dollar index, which measures the value of the US dollar against a basket of major currencies, has also held onto its gains, adding pressure to risk assets like Bitcoin.

Written By
Joe Yans