Crypto’s next move depends on the next Fed rate hike: Options trading

The direction of the price of bitcoin and other cryptocurrencies likely depends on whether the US Federal Reserve takes a more hawkish approach to raising interest rates as it battles inflation, Imran Lakha, founder of Options Insights, said on Tuesday.

Earlier this month, bitcoin (BTC), the largest cryptocurrency by market capitalization, hit its highest level since August. But bitcoin fell after Friday’s personal consumption expenditures (PCE) price index data from the US Commerce Department rose an unexpectedly robust 5.4% in January. Economists had predicted an increase of 5%.

Bitcoin and other cryptos fell after the report was released. Additionally, according to CME’s FedWatch tool, the odds of the US Federal Reserve raising its benchmark interest rate by 50 basis points in March have risen thanks to the PCE index data. It increases volatility.

Lakha said on CoinDesk TV’s “First Mover” that volatility dropped significantly between November and December in the wake of the collapse of major crypto companies including Exchange FTX.

It wasn’t until downside volatility subsided that risk appetite returned to the market, he said. This in turn led to more purchases of bullish bets (calls) compared to bearish bets (puts) in the options markets. Call options are financial contracts that give the option buyer the right, but not the obligation, to buy, while puts give the right, but not the obligation, to sell.

“When we started to see that the market could come back to life and we started to see the big 10% plus moves to the upside, all those biases turned back against calls, especially on bitcoin,” Lakha said.

Now, he said, interest in puts has more or less “evaporated after the market bottomed out last year.”

BTC is currently trading at just above $23,500, but Lakha did not rule out the possibility that it “could trade all the way down to $16,000” before bouncing back to $28,000 or even $30,000. The implied levels of volatility could be cheap enough to make purchases attractive again, he said.

More broadly, the crypto options market at large relies on bitcoin staying above the $20,000 to $21,000 threshold to support projects in the industry, Lakha noted.

Retail investors who still own crypto are probably in it for the long haul, he said.

“They’re not really buying it from a tactical perspective. They’re in it, but they’ve seen the bad times,” Lakha said. “They’re probably going to stick with it.”