Since October of last year, Bitcoin (BTC) has experienced a notable bull run, characterized by a general trend of subdued market activity during the weekends. However, recent data suggests that this trend is about to change significantly. As of now, Bitcoin’s “implied volatility term structure” indicates an expectation of more pronounced price movements on Saturdays compared to the days leading up to October 25. This information is derived from the options data tracked by Arbelos Markets on Deribit.
The term structure of implied volatility serves as a crucial tool for traders, providing a graphical representation of expected price fluctuations based on options data across various expiration dates. Typically, this structure exhibits an upward slope, indicating that longer-duration options tend to trade at higher implied volatility levels than those with shorter durations. However, as of this writing, the term structure has shown a distinct kink. Specifically, options set to expire on October 5 are trading at an annualized implied volatility of 51.44%, which is notably higher than the implied volatility for options expiring on October 6, 11, 18, and 25.
This anomaly suggests that traders are anticipating substantial price swings for Saturday, likely in response to the release of Friday’s nonfarm payrolls (NFP) data and ongoing geopolitical tensions. Joshua Lim, co-founder of Arbelos Markets, has noted this significant kink in the volatility curve. He explained, “Friday (Oct. 4) is trading around 39 vol and Saturday (Oct. 5) is trading at 51 vol. The market is pricing in a risk premium from nonfarm payrolls data, but more importantly, some probability of an Israeli retaliation post-Rosh Hashanah.”
Focus on Nonfarm Payrolls
The U.S. Bureau of Labor Statistics is set to release the NFP data on Friday at 12:30 UTC. According to analysts at FXStreet, the data is projected to reveal an addition of approximately 140,000 jobs in September, following a disappointing increase of just 142,000 jobs in August. The unemployment rate is expected to remain steady at 4.2%, and the year-on-year growth rate of average hourly earnings is anticipated to match August’s figure of 3.8%.
Analysts at ING have pointed out that the risks surrounding this data release lean towards a hawkish adjustment of expectations for Federal Reserve interest rate cuts in November and December. They caution that unless the data significantly misses expectations, the U.S. dollar may strengthen. The Federal Reserve had previously cut rates by 50 basis points in the last month, which triggered a rally in risk assets, including Bitcoin. Currently, market participants are bracing for at least another 50 basis points cut by the end of the year.
ING elaborates that the current pricing for year-end Fed funds largely reflects the anticipation of a 50 basis point cut in either November or December. This scenario leaves room for a potential realignment with the Fed’s less dovish rhetoric, which could pose upside risks for the dollar. Given Fed Chair Jerome Powell’s recent comments pushing back against further rate reductions, the threshold for a negative reaction from the dollar to U.S. data may be higher than previously expected. A stronger dollar typically exerts downward pressure on risk assets, including Bitcoin, as well as traditional safe havens like gold.
Geopolitical Tensions and Market Reactions
Adding to the complexity of the current market landscape is the escalating geopolitical situation in the Middle East. On October 1, Iran launched at least 180 ballistic missiles at Israel, significantly heightening tensions and increasing the risk of a potential full-scale conflict. This incident prompted a wave of risk aversion among investors, leading to a more than 4% decline in Bitcoin’s price, which tested the critical support level of $60,000.
In light of these developments, analysts at ING suggest that investors are on high alert, closely monitoring the potential for Israeli retaliation against Iran. This situation has resulted in rising crude oil prices and a strengthening dollar index, further complicating the market dynamics. Should any military action occur over the weekend, when traditional markets are closed, it is likely that both traditional and cryptocurrency traders will react swiftly in the digital assets market. Such reactions could lead to unusually volatile trading conditions over the weekend, as traders express their views on the evolving geopolitical landscape.
Conclusion
In conclusion, the current state of Bitcoin and the broader cryptocurrency market is being shaped by a confluence of factors, including anticipated economic data releases and geopolitical tensions. As traders prepare for a potentially volatile weekend, the focus remains on how these elements will influence market sentiment and price movements going forward. The interplay between economic indicators and geopolitical developments will likely continue to create a dynamic and unpredictable trading environment for Bitcoin and other cryptocurrencies.