Analysing the Fed’s Impending Decision
Decoding Market Expectations
Current market sentiment, as indicated by the CME FedWatch Tool, anticipates a 25 basis point cut during Wednesday’s meeting, with expectations leaning towards further easing before the year concludes. This expectation is already baked into Bitcoin’s price, making any deviation from this path a potential catalyst for significant market movement.
ETF Flows: The Bellwether of Bitcoin’s Fate
The performance of US spot Bitcoin ETFs serves as a key indicator of investor sentiment and a direct conduit for capital flows into the Bitcoin ecosystem. Recent weeks have seen a volatile mix of inflows and outflows, underscoring the market’s sensitivity to macroeconomic news. The concentration of ETF holdings remains with industry leaders such as IBIT (with cumulative net inflows of $65.3 billion) and FBTC (with $12.6 billion), while GBTC continues to experience outflows (at -$24.6 billion). How Fed policy impacts these flows will be crucial.
Positioning and Derivatives Risk
Options open interest on Deribit is currently near record highs, signaling heightened anticipation of a significant price swing following the Fed’s announcement. Perpetuals funding rates across major exchanges are modestly positive, coupled with high aggregate futures open interest. This creates a precarious situation where any unexpected news could trigger a cascade of liquidations, exacerbating market volatility. The lessons from the $147 million BTC liquidation event on October 17th remain fresh in traders’ minds.
Unpacking the Macroeconomic Context
The Shifting Landscape
Over the past two months, expectations regarding the Fed’s policy path have shifted towards rate cuts, although recent US economic data flow has been inconsistent. Real yields have eased from their summer peaks, with the 10-year TIPS proxy hovering around 1.7%, and the dollar has stabilized. These factors play a significant role in shaping risk appetite for digital assets. Bitcoin has shown an inverse correlation with US real yields and tends to underperform when the dollar strengthens, though these relationships can be fluid and unpredictable.
Possible Scenarios and Their Implications
Several potential scenarios could unfold following the Fed’s decision. Here’s a breakdown of each outcome and its likely impact on the crypto market:
-
25bp Cut with Cautious Tone:
This scenario would likely result in stable to slightly lower 10-year real yields and a steady to softer dollar. ETF flows could see a mixed-to-modestly positive trend. The spot market would likely trade within a range, with dip-buying activity during press conference-induced volatility. Derivatives risk remains high, with potential for two-way price swings.
-
Dovish 25bp Cut with Easing Bias:
A more dovish stance would likely pressure real yields and the dollar, triggering positive ETF inflows and a potential 6–12% upside move in Bitcoin over the subsequent 72 hours as market participants rush to capitalize on the shift.
-
Hold with Firm Tone:
This outcome would likely push real yields and the dollar higher, leading to flat to negative ETF flows, with resilient performance from leading funds like IBIT and FBTC. Increased long liquidations would be expected given elevated open interest.
-
Surprise 50bp Cut:
A surprise rate cut of this magnitude would send real yields plummeting and the dollar sharply lower, igniting significant ETF inflows and a potential 10–15% squeeze in Bitcoin prices. Options markets would likely see a surge in call option activity, followed by profit-taking later in the week.
Day-of Execution Strategies
Monitoring Key Indicators
During the Fed’s statement and press conference, it’s crucial to closely monitor the 10-year real yield proxy and the Dollar Index (DXY). A 10bp drop in real yields has historically correlated with stronger ETF inflows the following day, while a strong dollar often triggers defensive flows. Stay alert.
Analysing ETF Flows in Real-Time
Keep a close watch on the U.S. spot ETF flow data from sources like SoSoValue or Farside Investors after 6 to 7 p.m. ET, and again before the market open, to capture any late allocation trends. This is crucial for understanding institutional sentiment.
Assessing Derivatives Stress
Monitor aggregate open interest versus market cap, funding rate heat maps, and liquidation data on CoinGlass. Cross-reference this information with options 25-delta skew and term structure on Deribit to gauge whether the market is leaning towards put-rich positions (bearish) or call-rich positions (bullish).
Beyond the Fed: Further Catalysts
Economic Data Releases
Beyond the Fed’s decision, key economic data releases are on the horizon, including Q3 GDP and personal income and outlays, including the PCE (Personal Consumption Expenditures) price index. Traders are awaiting this week’s new economic reports to clarify the Fed’s next move.
Microstructure Considerations
In addition to macro factors, monitor the crypto market’s microstructure, including ETF breadth relative to the leaders, any single-day outlier ETF flow exceeding $300 million, CME share of futures open interest, and front-month implied volatility into month-end. These factors will provide insights into how the market is processing the policy path.
Caveats and Considerations
Correlation Shifts
It’s essential to acknowledge that correlation regimes can shift. Bitcoin’s relationship with real yields and the dollar has been strong at times and weak at others. Therefore, please focus on the policy guidance and its transmission to rates, the USD, and ETF demand, rather than relying on a single correlation coefficient as a stable indicator.
In conclusion, the Fed’s upcoming policy decision is set to be a pivotal moment for the crypto market. By carefully analyzing the macroeconomic context, monitoring key indicators, and understanding the potential scenarios, traders can navigate the expected volatility and position themselves to capitalize on the opportunities that arise.
