Market Wrap: Bitcoin Pulls Back After Fed Chair's Comments; Volatility Oversold

Bitcoin (BTC) dipped below $41,000 on Monday after U.S. Federal Reserve Chair Jerome Powell said the central bank is prepared to aggressively raise interest rates to tame inflation.

Powell, speaking at the National Association for Business Economics (NABE) annual economic policy conference in Washington, D.C., noted that rates can rise in increments of 50 basis points instead of traditional 25 basis point moves. Tighter monetary policy can lead to slower economic growth, which is typically a headwind for speculative assets. Stocks and cryptocurrencies reacted negatively to Powell's comments during the New York trading day.

Elsewhere, traditional safe havens such as gold and the U.S. dollar rose, while the 10-year Treasury yield climbed above 2.3%, its highest level since 2019.

In crypto markets, most alternative cryptocurrencies (altcoins) outperformed bitcoin, suggesting that traders are still comfortable with risk, albeit less so relative to last week. BTC was roughly flat over the past 24 hours, compared with a 1% gain in ether (ETH), and a 7% rise in Algorand's ALGO token.

Similar to spot trading volume, implied volatility in the bitcoin options market declined after the Fed's interest rate decision last week. That means the spike in trading activity and choppy price swings were short-lived.

Over the weekend, some traders noticed a large amount of volatility selling, possibly due to an unwinding of option hedges ahead of the Fed decision. As a result, once the event risk (Fed hike) is removed, the volatility curve steepens as traders discount near-term price swings.

Meanwhile, ether's short-term volatility is trading at a discount relative to bitcoin. "This rarely happens and must have been caused by larger unwinding of Fed-related hedges in ETH versus BTC," QCP Capital, a Singapore crypto trading firm, wrote in a Telegram post. Overall, the firm expects an increase in realized volatility from oversold levels.

For option traders, similar discounts can be used to offset volatility exposure between two assets, such as BTC and ETH. Read more here.

Digital assets in the CoinDesk 20 ended the day higher.

Sector classifications are provided via the Digital Asset Classification Standard (DACS), developed by CoinDesk Indices to provide a reliable, comprehensive, and standardized classification system for digital assets. The CoinDesk 20 is a ranking of the largest digital assets by volume on trusted exchanges.