Hedging costs plummet: Bitcoin traders run naked ahead of the Federal Reserve's decision

According to Woofun AI, the Bitcoin price stabilized around $63,400 on the eve of the Federal Reserve's two-day meeting, yet market sentiment was extremely conflicting. HSBC characterized Wednesday's resolution as the most uncertain in two years and one of the least certain decisions in more than four years. However, Bitcoin traders did not pay high hedging costs and instead drastically removed risk protection measures. This divergence between extreme macro-level confusion and extreme micro confidence forms the core tension in the current market.

Judging from the microstructure of the options market, although the ratio of put options to call options reflects the composition of open positions, it is difficult to see the true intention behind each transaction — call options may be either a direct bet on price increases or part of a complex strategy, while put options may be used for hedging, arbitrage, or as a component of larger transactions. What really reveals the intention to hedge is option pricing: although one-week put options still have a premium over similar call options, indicating that investors still value downside protection, this premium, known as the 'put option slope', has rapidly narrowed from nearly 13% on Friday to about 9%.

According to data compiled by Woofun AI, if the price of Bitcoin were to rise more than 10% from Tuesday's level to reach the $70,000 mark before these options contracts expire on July 31, this means investors holding bullish options would need large favorable market fluctuations sufficient to offset the rapid loss of time value, otherwise they would face huge losses in time value.

If the Federal Reserve decides to raise interest rates by 25 basis points, the short-term US Treasury bond yield and US dollar exchange rate are likely to rise, which will increase the financing pressure that relies on abundant liquid assets. Bitcoin will not only face regular macro-selling pressure at that time, but may also trigger hedging operations related to options. Traders who have sold downside risk protection products may be forced to sell Bitcoin futures or spot when prices fall and position sensitivity changes. This adjustment will further amplify the decline when the price falls below a large number of options trading support levels.

Conversely, if the Federal Reserve insists on “maintaining the status quo,” the situation is more complicated: as concerns about interest rate hikes decrease, traders may initially buy Bitcoin, but if Walsh suggests that interest rates may still be raised again in September, and US Treasury bond yields remain high, optimism will quickly subside. This poses a particular challenge to the huge call options due on July 31. Even with a slight rebound in the market, the exercise prices of $70,000 and $72,000 remain out of reach, and the remaining contract value continues to decline over time. It is only when the Federal Reserve mentions mild signals such as falling energy prices, a weak employment situation, or a fall in the inflation rate, which push yields and the US dollar exchange rate lower and raise expectations of improving liquidity, that is most likely to push prices close to these exercise prices.

Due to the lack of new forecasting data, details of policy statements, voting results, and Walsh's responses at the press conference became key variables. Investors will be watching closely for any changes in the Fed's description of inflation, employment, and risk balance, particularly hints of another rate hike in September. The two-year US Treasury bond yield will be the fastest signal to determine whether the policy is becoming stricter, and the continued rise in the US dollar exchange rate means that the financial environment is tightening beyond expectations. Walsh's communication strategy was designed to allow the market to interpret economic data based on fewer signals, so Bitcoin traders reduced immediate hedging ahead of this highly uncertain decision. Wednesday's results will test whether this layout is an efficient risk assessment or whether it stems from excessive confidence in the Federal Reserve's rare unexpected regulation in the past.