Bitcoin’s price surge towards $28,000 on October 1 was influenced in part by the uncertainty surrounding the United States debt limit. However, President Joe Biden signed the spending bill just hours before the September 30 deadline, avoiding a government shutdown. This development has left investors wondering if the momentum for cryptocurrencies will continue to be positive now that the worst-case political-economic scenario is off the table. It is important to note, though, that the bill only provides additional funding for the next 45 days, allowing more time for the House and Senate to work on their funding plans for 2024.
While it may seem tempting for investors to utilize futures contracts to go long on Bitcoin considering the current extension, there is a significant risk of liquidation if the price suddenly drops. Furthermore, it is impossible to predict whether a successful budget discussion in the future will benefit cryptocurrencies.
Lawmakers now have until November 17 to find a solution before the current extension expires. Margaret Spellings, the President and CEO of the Bipartisan Policy Center, emphasizes the need to address fiscal health and avoid negotiating on the brink of government shutdowns and debt defaults.
Although the crisis has been narrowly averted, the overall risk of an economic recession still persists. The U.S. Federal Reserve is grappling with ongoing inflation and rising energy prices, which have caused the S&P 500 to reach its lowest point in 110 days and pushed the 10-year Treasury yield to levels not seen since October 2007.
In addition to these concerns, oil prices have surged to $90, marking a 27.5% gain in just three months. This upward pressure on inflation is expected to further hamper economic activity.
Bitcoin, amidst this turmoil, has seen an increase in value, breaking through the $28,000 resistance on October 2. This performance has led investors to anticipate heightened volatility for the cryptocurrency as the upcoming debt ceiling decision approaches.
Professional traders, considering the uncertain outcome of the political debate, are avoiding directional risk and instead opting for the reverse (short) iron butterfly strategy. This strategy is a limited-risk, limited-profit trading approach. The trade involves selling put options with a strike price of $26,000 and simultaneously selling call options with a $30,000 strike. To complete the trade, one should buy call options with a strike price of $28,000 and additional put options with a $28,000 strike.
While call options grant buyers the right to acquire an asset, the contract sellers assume potential negative exposure. To fully hedge against market fluctuations, an investor must deposit 0.253 BTC (approximately $7,170), which represents the maximum potential loss.
For this particular strategy to be profitable, Bitcoin’s price must be below $26,630 on October 27 (a decrease of 6%) or above $29,280 (an increase of 3.4%). Although this trade offers a potentially substantial profit zone, losses are 90% higher than potential gains if Bitcoin remains stagnant.
It is worth noting that investors have the option to reverse the operation before the options expire, preferably after a substantial Bitcoin price movement. This can be done by repurchasing the two options initially sold and selling the two options originally bought.
In conclusion, while the United States has temporarily avoided a government shutdown and debt default, the overall risk of an economic recession persists. Bitcoin’s initial reaction to these events does not guarantee a bullish momentum, and professional traders are opting for strategies that offer limited-risk and limited-profit opportunities. Conviction in volatility is crucial as the risk-reward scenario is reversed, with losses outweighing potential gains if Bitcoin remains stagnant.