Fed Rate Cut: Boost for Stocks, But Bitcoin Stays Below $100K

Fed rate cut may pump stocks but Bitcoin options call sub-$100K in January

Summary:
The recent Federal Reserve decisions have raised liquidity in the market, but Bitcoin’s options pricing suggests that investors are doubtful about its ability to surpass the $100,000 mark in the near future. With economic uncertainties and Bitcoin’s underperformance relative to gold, many are cautious about a strong Bitcoin rally.

Key Takeaways:

Bitcoin derivatives are signaling low confidence in overcoming the $100,000 barrier, reflecting broader economic uncertainties.
Despite increased liquidity due to Federal Reserve actions, large investors (whales) remain skeptical about a lasting Bitcoin price surge.

Bitcoin’s pricing in derivatives markets reveals a lack of strong belief in reaching the $100,000 threshold. This hesitation mirrors ongoing macroeconomic uncertainties and Bitcoin's weaker performance compared to gold.

Gold/USD (left) vs. Bitcoin/USD (right). Source: TradingView

The Federal Reserve's recent decision to maintain interest rates at 3.75% was widely expected, with Fed Chair Jerome Powell adopting a cautious tone during the post-meeting press conference. He pointed out lingering risks related to the labor market's weakness and persistent inflation. Notably, two Fed members voted to keep rates at 4%, marking an unusual division in a typically unified committee.

A significant aspect of the Fed's announcement was its plan to start purchasing short-term government bonds to "help manage liquidity levels." This initial $40 billion program represents a marked shift from recent years characterized by a consistent reduction of the Fed's balance sheet, which currently stands at $6.6 trillion, down from a peak of $9 trillion in 2022.

The additional liquidity will enhance the cash banks can lend, promoting credit growth, encouraging business investment, and supporting consumer borrowing during a time of general economic slowdown.

Bitcoin Options Predict 70% Chance BTC Will Stay Under $100,000

According to the Black & Scholes model, the $100,000 call option for Bitcoin suggests a 70% chance that Bitcoin will remain at or below this level by January 30.

$100k BTC call option at Deribit, USD. Source: laevitas.ch

To claim the right to buy Bitcoin at a fixed price of $100,000 on January 30, buyers must pay an upfront premium of $3,440. In contrast, this same call option was priced at $12,700 just a month ago. This option serves as a type of insurance and becomes worthless if Bitcoin closes below the strike price. However, the potential profit for the holder remains limitless as long as the market moves significantly above $100,000.

Interestingly, the expiry of Bitcoin’s monthly options in January aligns just two days after the next Federal Open Market Committee (FOMC) meeting on January 28. Traders currently assess a 24% probability of another interest rate cut in January, with increased uncertainty following the government funding shutdown in November impacting visibility into U.S. employment and inflation reports.

The stock market typically benefits from the Federal Reserve's supportive policies as companies anticipate lower capital costs and easier financing for consumers. However, Bitcoin's response tends to be less predictable, as investors moving away from secure short-term government bonds may not see cryptocurrency as a dependable store of value.

S&P 500 index (left) vs. US 5-year Treasury yield (right). Source: TradingView

The yield on the U.S. five-year Treasury was 3.72% on Wednesday, a decrease from 4.1% six months ago, while the S&P 500 has jumped 13% during that same timeframe. Traders are concerned that rising government debt could undermine the dollar and create inflationary pressure, making equities appear more attractive despite worries about inflated valuations.

What could trigger a Bitcoin rally remains unclear; however, escalating costs associated with default protection in the artificial intelligence sector might lead traders to reduce their stock exposure.

For now, Bitcoin whales and market makers maintain a strong skepticism regarding a sustained rise above $100,000, despite the more favorable conditions created by the Fed's policy adjustments.

Related: Conflicted Fed cuts rates but Bitcoin’s ‘fragile range’ keeps BTC under $100K