Here’s how Bitcoin investors can trade the tension surrounding a U.S. government shutdown

On October 1, Bitcoin (BTC) prices were on a bull run towards $28,000, driven in part by uncertainty over the U.S. debt ceiling. However, US President Joe Biden averted a government shutdown by signing the spending bill hours before the September 30 deadline.

Now that the worst-case political and economic scenarios are no longer in play, investors are now questioning whether the momentum for cryptocurrencies remains favorable. But it’s worth noting that the bill only provides additional funding for the next 45 days, giving the House and Senate more time to develop a funding plan for 2024.

At first glance, it might be tempting for investors to go long Bitcoin using futures contracts. However, there is a significant risk of liquidation if prices suddenly drop, and it is impossible to predict whether future successful budget discussions will be favorable for cryptocurrencies.

With the current extension in place, lawmakers have until November 17 to find a solution. Margaret Spellings, president and CEO of the Bipartisan Policy Center, said:

“We cannot continue to delay our fiscal health and negotiate on the brink of a government shutdown and debt default.”

There is no doubt that, although a crisis has been narrowly avoided, the overall risk of a recession remains. The Fed is grappling with persistent inflation and rising energy prices that have sent the S&P 500 to a 110-day low and pushed the 10-year Treasury yield to its highest level since October 2007 .

Additionally, oil prices have soared to $90, a 27.5% increase in just three months. Upward pressure on inflation is expected to further constrain economic activity.

On September 27, Neel Kashkari, Chairman of the Federal Reserve Bank of Minneapolis Express There is uncertainty over whether interest rates have risen enough to cope with rising prices.

Bitcoin’s initial reaction doesn’t guarantee bullish momentum

Amid all this turmoil, Bitcoin increased in value, breaking through the $28,000 resistance level on October 2. This performance has prompted investors to expect cryptocurrency volatility to increase as the upcoming debt ceiling decision approaches.

Given the uncertainty about the outcome of the political debate, professional traders avoid directional risk and opt for the contrarian (short) Iron Butterfly, a trading strategy with limited risk and limited profit.

As of October 2, the above prices are accurate, with Bitcoin trading at $28,326. All options listed expire on October 27, but the strategy can also be adapted to different time frames. It’s important to remember that options have a fixed expiration date, which means a price increase must occur within a specified period of time.

The recommended neutral market strategy involves selling 5.4 put options contracts worth $26,000 while simultaneously selling 5.4 call options with a $30,000 strike price. To complete the trade, you should purchase 5.8 call option contracts worth $28,000, and an additional 5 put option contracts worth $28,000.

While a call option gives the buyer the right to purchase an asset, the seller of the contract assumes potential negative risk. To fully protect against market volatility, investors must deposit 0.253 BTC (approximately $7,170), which represents the maximum potential loss.

Belief in volatility is critical because risk reward is inverse

For this investor to profit, the Bitcoin price would have to be below $26,630 (down 6%) or above $29,280 (up 3.4%) on October 27. Essentially, the trade offers a potentially substantial profit zone, but if Bitcoin remains stagnant, losses will be as much as 90% higher than potential gains.

The maximum payout is 0.133 BTC (approximately $3,770). However, if traders believe volatility is coming, a 24-day move of 6% appears achievable.

It is worth noting that investors can choose to reverse the operation before the option expires, preferably after a significant move in Bitcoin price. To do this, they should buy back the two options they originally sold and sell the two options they originally bought.