Blofin Hot Pursuit: The Fed’s Interest Rate Hike is Coming as Scheduled, How Much will it Affect the Crypto Market?
The rate hike as expected released short-term bearish sentiment, but the overall sentiment in the crypto market remains bearish in the long run.
At the latest Federal Reserve meeting on May 4th, Fed chairman Jerome Powell officially announced a 50bps interest rate hike and expected that a 50bps interest rate hike might be carried out in following meetings, which is basically in line with market expectations.
It is worth noting that, judging from the performance of the risk asset market, investors generally believe that the Fed’s meeting this time is more moderate: Powell denied the possibility of a single rate hike of 75 basis points and also said that the balance sheet will be reduced as expected (the reduction of the balance sheet will begin in June, and the final reduction rate will be $95 billion per month). Affected by this, the continuous bearish sentiment in April in the risk asset market has been released. The Dow Jones index soared 1.8%, the S&P 500 rose 1.8%, the Nasdaq rose 1.6%, and the overall market capitalization of the crypto market returned to around $1.8 trillion.
In the risk asset market, the release of bullish sentiment in the crypto market is relatively large. It seems like most investors have fully priced in a 50bps rate increase. After they learned that a 75 basis point hike was unlikely to happen, the price of BTC surged, briefly topping $40,000 in the past 24 hours, more than 5% at one point.
In the crypto derivatives market, the funding rate of BTC perpetual contracts turned significantly positive for the first time in nearly a month. As one of the most important sentiment indicators in the crypto market, positive funding rates indicate a return to a degree of investor bullishness — bulls even need to pay fees to keep the market in balance, as was the case during last year’s bull market.
Bullish sentiment is also affecting the options market. Just around Fed meeting, many block traders chose to use a variety of ways to buy call options or use strategies such as risk reversals to indicate a bullish viewpoint, making the sentiment of the options market fluctuate for the first time in the month, which has long been dominated by bearish sentiment before.
From the content of this meeting, it is not difficult to find that the Fed has to rationalize the pace of inflation management in the context of the increasingly obvious risk of economic recession.
Despite the high inflation rate, the tensions in Eastern Europe and the measures to control the epidemic in East Asia have caused significant adverse effects on the upstream and downstream of the supply chain of industrial and agricultural products, and the difficulty of the supply chain is the reason why the inflation rate has remained high.
Therefore, whether for institutional or ordinary investors, anti-inflation demand is still one of the essential reasons for holding or trading risk assets, which has also brought some support to the risk asset market.
However, in the longer term, risk asset markets are likely to remain under pressure from the Fed’s series of liquidity tightening policies. In order to achieve the goal of controlling inflation to 2%, although the Fed has made concessions in terms of the rate of interest rate hikes due to the impact of the economic situation, the process of liquidity contraction has not slowed down. As the Federal Reserve continues to raise interest rates and shrink its balance sheet, the risk asset market still faces the threat of continued liquidity loss and underperformance, which is especially true for the relatively more sensitive crypto market.
The skewness data of the options market also confirms this view. The skewness of short-term options expiring in 7 days has risen significantly, probably because the interest rate hike as expected has weakened investors’ short-term risk aversion. However, the overall skewness of the options market remains below 0, suggesting that most options investors remain bearish on the mid-term and long-term market performance even if the expected rate hike unleashes short-term bearish sentiment.
In addition, the “implied dovish” attitude released by the Fed did not affect the pessimistic expectations of investors in the futures market. Taking BTC futures expiring at the end of 2023q1 as an example, its futures premium is still showing a continuous downward trend and has recently fallen below 4%. Typically, a less than 4% premium signifies a further deepening of bear market sentiment. To some extent, the premium that investors are willing to pay right now indicates that investors expect the future price appreciation room of BTC to be no significant difference from the risk-free yield.
To sum up, the overall bearish sentiment in the crypto market has not changed much. The current temporary bullish sentiment is mainly attributed to the release of short-term bearish sentiment due to the interest rate hike as expected in advance. Although the release of sentiment has caused significant price volatility in the short term, providing some income opportunities for options-based gamma strategies, the crypto market will remain “soft and stable” in the long term.
However, a sluggish but stable market can also bring some profit opportunities — for option sellers can at least steadily capture some gains over time (the “Theta”). It is not difficult to predict that strategies based on the time value of options will become an essential source of income for the crypto market in the future.
