Bitcoin's Surge Amid U.S. Debt Limit Uncertainty: A Temporary Relief or Lasting Momentum?
Summary:
President Biden signed a spending bill hours before a potential government shutdown, signaling temporary relief for Bitcoin investors who were betting on the cryptocurrency during the U.S. debt limit uncertainty. However, the temporary nature of the bill, which provides only 45 days of extra funding, raises questions about the sustainability of the cryptocurrency's momentum. Amid these economic uncertainties, professional traders are relying on limited-risk, limited-profit trading strategies. Overall, the U.S. fiscal situation remains complex with the risk for economic recession still evident, and Bitcoin's position rather uncertain.
The recent surge in Bitcoin's (BTC) price towards $28,000 on the 1st of October was partly driven by the ambiguity around the U.S. debt ceiling. Nonetheless, U.S. President Joe Biden managed to sign the spending bill mere hours ahead of the Sept. 30 deadline, sidestepping a government shutdown. As a result, some investors wonder whether the momentum for cryptocurrencies can last now that the direst political-economic scenario is off the table. Still, it's important to remember that this bill barely secures additional funding for the next month and a half, allowing Congress more time to deliberate on their funding strategies for 2024.
It may initially appear enticing for investors to use futures contracts to back Bitcoin, but this comes with its risks. A sudden drop in price could result in liquidation, and the potential outcome of future budget negotiations' impact on cryptocurrencies is truly unpredictable.
With the current temporary extension, lawmakers have until Nov. 17 to devise a solution. As Margaret Spellings, President and CEO of the Bipartisan Policy Center, emphasizes, "We cannot keep deferring our financial well-being and negotiating on the edge of government shutdowns and debt lapses." There remains a strong risk of economic recession despite narrowly escaping one crisis, exacerbated by persistent inflation, climbing energy costs, and the Federal Reserve's struggles.
These factors have led to the S&P 500's lowest point in 110 days and catapulted the 10-year Treasury yield to heights not witnessed since October 2007. Moreover, the spike in oil prices to $90—a 27.5% increase over three months—intensifies inflation pressure, expected to further restrict economic activity. Neel Kashkari, the Minneapolis Fed President, shared his doubts on Sept. 27 about whether interest rates have been sufficiently raised to counter this price hike.
Despite the ongoing instability, Bitcoin's worth has soared, soaring past the $28,000 threshold on Oct. 2. Investors now predict more volatility for the cryptocurrency pending the debt ceiling decision. Nevertheless, professional traders are likely to avoid directional risk due to the uncertain outcome of the political discourse and instead favor limited-risk, limited-profit trading strategies.
As of Oct. 2, Bitcoin exchanged hands at $28,326. The recommended neutral-market strategy would be to sell 5.4 contracts of $26,000 put and $30,000 call options each while buying 5.8 contracts of $28,000 call options and also 5 contracts of the $28,000 put options.
Although a call option allows the buyer the right to procure a resource, the contract vendor acquires a possible negative exposure. To effectively safeguard against market instabilities, an investor will need to deposit 0.253 BTC (about $7,170), indicating the utmost potential loss.
In order to guarantee returns, Bitcoin’s price must be less than $26,630 (a 6% decrease) or more than $29,280 (a 3.4% rise) on Oct. 27. Though this trade offers a considerable profit zone, the potential losses could outweigh the gains by 90% if Bitcoin remains stagnant. The maximum profit a trader can get is 0.133 BTC (approximately $3,770).
Before the options expire, investors have the option to reverse their action, preferably after Bitcoin’s price has significantly moved. To do so, they can repurchase the two options they initially sold and sell the two options they initially bought.
This article is intended for informative purposes and should not be interpreted as legal or investment advice. The views and opinions expressed herein belong solely to the author and do not necessarily represent those of Cointelegraph.
Published At
10/3/2023 6:45:07 PM
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