Here’s how Bitcoin investors can trade the tension surrounding a U.S. government shutdown
Bitcoin’s recent surge towards $28,000 on October 1 was in part fueled by the uncertainty surrounding the United States debt limit. However, just hours before the September 30 deadline, U.S. President Joe Biden signed the spending bill, averting a government shutdown. This has left investors questioning whether the bullish momentum for cryptocurrencies will continue, now that the worst-case scenario has been avoided.
It is worth noting that the bill signed by President Biden only provides additional funding for the next 45 days. This means that there is still time for the House and Senate to work on their funding plans for 2024. Therefore, the uncertainty surrounding the debt limit issue has not been completely resolved.
While it may be tempting for investors to use futures contracts to go long on Bitcoin, there are significant risks involved. If the price suddenly drops, there is a high chance of getting liquidated. Furthermore, it is impossible to predict whether a successful budget discussion down the road will be beneficial for cryptocurrencies.
With the current extension in place, lawmakers have until November 17 to find a solution. Margaret Spellings, the President and CEO of the Bipartisan Policy Center, emphasizes the need to stop postponing fiscal health and negotiating on the brink of government shutdowns and debt defaults.
Despite narrowly avoiding a crisis, the overall risk of an economic recession remains. The U.S. Federal Reserve is grappling with persistent inflation and rising energy prices, which have led to declines in the S&P 500 and a rise in the 10-year Treasury yield. Additionally, oil prices have surged, putting further pressure on inflation and potentially constraining economic activity.
Amidst all this turmoil, Bitcoin has continued to increase in value, surpassing the $28,000 resistance on October 2. Professional traders, anticipating heightened volatility in the cryptocurrency as the debt ceiling decision approaches, may choose to adopt a limited-risk trading strategy known as the reverse (short) iron butterfly.
This neutral-market strategy involves selling put and call options with different strike prices to benefit from a potential decline or increase in Bitcoin’s price. However, it is important to remember that options have expiry dates, so the price movement must occur within the defined period.
Conviction in volatility is essential for this strategy, as the risk-reward is reversed. The potential profit zone is substantial, but losses can be 90% higher than potential gains if Bitcoin remains stagnant. Investors who believe that volatility is imminent can potentially profit from a 6% movement in Bitcoin’s price within 24 days.
It is important to note that investors have the option to reverse the operation before the options expire, especially after a significant Bitcoin price movement. This would involve repurchasing the initially sold options and selling the originally bought options.
In conclusion, although the United States has temporarily avoided a government shutdown due to the debt limit issue, the overall risk of an economic recession remains. The decision on the debt ceiling still needs to be reached by November 17, and the Federal Reserve continues to grapple with inflation and rising energy prices. Amidst this uncertainty, Bitcoin’s price has continued to increase, prompting professional traders to adopt limited-risk trading strategies. However, it is crucial for investors to assess the risks and rewards carefully before engaging in any trading activities.
