Fed Signals Sharp Rate Hike in March Due to Inflation — Here’s How Bitcoin Traders Can Prepare

Like it or not, for crypto-investors, the US Federal Reserve’s policy of interest rate hikes and high inflation is the most relevant measure to gauge demand for risk assets. By raising the cost of capital, the Fed increases the profitability of interest-bearing instruments, but this is detrimental to the stock market, real estate, commodities and cryptocurrencies.

A positive aspect of the Fed’s meetings is that they are scheduled well in advance, allowing Bitcoin (BTC) traders to prepare for them. The Federal Reserve’s policy decisions historically cause extreme intraday volatility in risk assets, but traders can use derivative instruments to provide optimal results when the Fed adjusts interest rates.

Another challenge for traders is that they face pressure from Bitcoin which is highly correlated with stocks. For example, the 50-day correlation coefficient versus S&P 500 futures has exceeded 70% since February 7th. Although it does not state cause and effect, it is clear that cryptocurrency investors are waiting for the direction of traditional markets.

It is also possible that Bitcoin’s low emissions could prove to be an advantage as investors realize that the Fed is running out of options to curb inflation. By raising interest rates further, it could cause the US government’s debt repayments to spiral out of control and eventually pass $1 trillion annually. This creates a huge incentive for Bitcoin bulls, but extreme caution is needed by those willing to trade based on interest rate increases.

Risk takers could benefit from buying Bitcoin futures contracts to leverage their positions, but they could also be liquidated if a sudden negative price movement occurs ahead of the Fed’s March 22 decision. For this reason, pro-traders are more likely to choose options trading strategies such as the skewed iron condor.

A balanced risk approach to the use of call options

By trading multiple call (call) options for the same expiration date, traders can achieve gains 3 times higher than the potential loss. This options strategy allows a trader to profit on the upside while limiting losses.

It is important to remember that all options have a set expiration date, so Bitcoin’s price increase must occur during the specified period.

Listed below are the expected returns using Bitcoin options for the March 31st expiration, but this methodology can also be applied to different time frames. Although the costs will vary, the overall efficiency will not be affected.

The call option gives the buyer the right to acquire an asset, but the contract seller gets (potential) negative exposure. The iron condor consists of selling the call and put options at the same expiry price and date.

As shown above, the profit range target is above $23,800 and the worst case scenario is 0.217 BTC (or $5,156 at current prices) if the March 31st expiration price happens below $23,000.

Related: Bitcoin Price Enters “Transitional Phase” According to BTC Chain Analysis

To initiate the trade, the investor must purchase 6.2 contracts of the $23,000 put option. Then the buyer must sell 2.1 contracts of the $25,000 call option and another 2.2 contracts of the $27,000 call option. Then the investor should sell 3.5 contracts of the $25,000 put option combined with 2 contracts of the $27,000 put option.

As a final step, the trader needs to buy 3.9 contracts of the $29,000 call option to limit losses above the level.

This strategy yields a profit if Bitcoin trades between $23,800 and $29,000 on March 31st. The net profit peaks at 0.276 BTC ($6,558 at current prices) between $25,000 and $27,000, but remains above 0.135 BTC ($3,297 at current prices) if297 at today’s rate. and $27,950 range.

The investment required to open this skewed iron condor strategy is the maximum loss, hence 0.217 BTC or $5,156, that will occur if Bitcoin trades below $23,000 on March 31st. The advantage of this strategy is the wide profit target range, which provides a better risk-to-reward outcome than leveraged futures trading, especially considering the limited downside.