- Implied volatility will remain high until the macroeconomic situation stabilises.
- The market still considers the possibility of an emergency Federal Reserve meeting, with the chances of a 50 basis point rate cut in September soaring to 78.5%.
The cryptocurrency market is set to face increased volatility as the VIX index reaches its highest level since the COVID-19 panic. This was stated by Bo Han Jiang, head of over-the-counter options trading at Abra, in an interview with The Block.
The expert highlighted the vulnerability of investors who have recently shown little demand for downside protection in derivatives.
The market was positioned in “upper” calls due to the anticipated speech by US presidential candidate Donald Trump and the launch of an ETH-ETF, he added.
“Participants actively sold volatility after both events. As a result, the spot retreated to its previous range despite various circumstances already causing the VIX to rise last week. I expect IV to remain high until the macroeconomic situation calms down,” commented Jiang.
Abra’s head of trading, Bob Walden, concurred with his colleague that the cryptocurrency market was slow to react to unfolding events.
“As the macroeconomic situation changes, investors still leaned towards growth, with little hedging against downside risks,” he noted.
Walden pointed out that funding rates for perpetual futures on Bitcoin and Ethereum turned negative over the past 24 hours, marking the sharpest downturn this year.
Low Liquidity and Margin Calls
Analysts at Bitfinex noted that market turmoil was driven by the significant strengthening of the Japanese yen and a series of unfavourable macroeconomic data, which increased the likelihood of more decisive monetary easing by the Federal Reserve to prevent a recession.
“Short-term support [for Bitcoin] will form around $48,900. If there is no bullish momentum, this area may be retested, while the macroeconomic environment at that time will determine further price action,” specialists commented.
Ruslan Lienkha, head of markets at YouHodler, believes the decline was exacerbated by low liquidity during weekend trading.
“During this period, institutions are usually inactive, and fiat transfers are difficult. As a result, investors faced a wave of margin calls on long positions. After such a significant drop, we may see a corrective rebound in Bitcoin. However, this growth is likely to be limited due to prevailing pessimism in broader markets,” warned the expert.
Analysts at Blofin stated that the likelihood of a complete reversal of the US financial cycle due to the unwinding of the carry trade with the yen is low. They noted that fundamental employment and economic data do not support an impending recession.
4. Fortunately, the likelihood of carry trade unwind triggering a complete turnaround in the US financial cycle is low, as the fundamental employment and economic data do not support an impending recession. However, the end of the carry trade still affects investor sentiment, and… pic.twitter.com/jGMaiT9XdW
— BloFin Academy (@BloFin_Academy) August 5, 2024
“However, the cessation of asset trading still affects investor sentiment, and bearish expectations in the short and medium term are spreading across many markets. If the interest rate gap between the Federal Reserve and the Bank of Japan narrows quickly, asset prices are likely to fall further,” explained the specialists.
25 or 50 Basis Points?
According to the futures market, the probability of a 50 basis point rate cut has reached 78.5% (the remaining 21.5% is for a 25 basis point cut). For comparison, a month ago, the figure was only 5.5%.
On the Polymarket prediction market, a bet emerged on the Federal Reserve holding an emergency meeting to ease policy. At the peak of panic, the probability of such an outcome reached 58% before dropping to the current 18%.
10x Research identified US economic indicators as the main factor behind Bitcoin’s decline.
Previously, ForkLog discussed with experts the reasons for the dump and explored the conditions under which high-capitalisation coins might begin to recover in price. Read the details in the article.