Bitcoin Options Markets, Risk Hedging Reduction — New Highs in the Making?

Bitcoin (BTC) surged 6% after the U.S. Federal Reserve cut interest rates by 0.50% on September 18, bringing the price close to a three-week high of $63,500. Despite the rally, derivatives indicators show that Bitcoin bulls are hesitant to increase their leveraged positions, with the $62,000 support level under pressure.

Interest rate cuts and job market data affect Bitcoin price

The U.S. jobless claims report, released on September 19, further boosted investor sentiment, with initial jobless claims falling to a four-month low of 219,000 from a July high of 250,000. While still relatively high, the decline represents an improvement. With inflation relatively stable at 2.5%, the Fed’s focus “has now shifted decisively to the labor market,” Stephen Innes of SPI Asset Management told Yahoo Finance.

In response to these developments, U.S. stock markets also performed well, with the S&P 500 hitting a record high on September 19. Federal Reserve Chairman Jerome Powell reassured investors, saying that “the U.S. economy is in good shape,” and that the rate cut was “a sign of faith, not panic.” Powell added that “the time to support the labor market is when the labor market is strong, not when layoffs start.”

But despite these macroeconomic changes, some investors believe the upcoming U.S. presidential election in November could have a bigger impact on the global economy. Billionaire investor Ray Dalio told CNBC that the election “highlights the challenges to the ability of society to function well.” Dalio avoided endorsing either major party candidate, instead advocating for “moderates to come together and (…) make great reforms.”

Dalio expressed concern about the prevailing “win at all costs mentality” that could lead to the loser “not accepting” the election results. While political debates have centered around topics such as abortion, immigration and climate change, Dalio noted that the high cost of living remains a top concern for voters, according to national polls.

Given the Biden administration’s negative stance on cryptocurrencies, it’s understandable that Bitcoin derivatives traders are hesitant to turn bullish too quickly. At a House subcommittee hearing on September 18, Arkansas Representative French Hill criticized the Securities and Exchange Commission (SEC) for injecting politics into its regulatory approach, creating “confusion and uncertainty.”

Bitcoin options show declining demand for downside protection.

To assess whether traders are gaining confidence in the $62,000 support level, it is important to analyze the Bitcoin futures funding rate. Perpetual contracts, often called reverse swaps, incorporate a built-in funding rate that is recalculated every 8 hours. A positive funding rate generally indicates a greater demand for leverage from buyers (long positions).

From September 18 to September 19, Bitcoin’s 8-hour funding rate remained relatively stable at 0.005%. This is equivalent to 0.5% on a monthly basis, which is characteristic of a neutral market. This represents a significant change from the negative rate observed on September 14, but the current rate shows that retail traders are still hesitant to be bullish on the Bitcoin price.

relevant: Fed rate cuts may be politically motivated and will increase inflation – Arthur Hayes

To determine whether this sentiment is limited to Bitcoin perpetual bonds, it is important to examine the demand in the BTC options market. The put-call volume ratio measures the balance between demand for put (sell) and call (buy) options. Typically, during periods of uncertainty, demand for protective put options increases, resulting in a ratio above 1.0.

On September 19, the Bitcoin options put-call volume ratio fell to 0.54, indicating that call options outnumbered put options by 86%. This is a marked change from the previous two days, which reflected balanced demand between calls and puts. Ultimately, Bitcoin traders may be hesitant to open leveraged long positions, but the reduced demand for downside protection suggests that traders are relatively comfortable with the $62,000 support level.