Market Wrap: Bitcoin Traders Take Some Profits Ahead of Fed Meeting, Expect Higher Volatility

Cryptocurrencies were mixed on Tuesday, indicating uncertainty among traders ahead of the U.S. Federal Reserve's interest rate decision tomorrow.

The Fed is expected to hike rates by 50 basis points (0.5 percentage point), which would be the first half point rise in 22 years. And over the next few meetings, the Fed could raise rates expeditiously to slow the pace of inflation.

Many central banks outside of the U.S., particularly in emerging markets, have already started to raise interest rates. Meanwhile, the combination of slower economic growth and tighter monetary policy has weighed on speculative assets including stocks and cryptos.

The Fed meeting could be a source of rising volatility, according to some analysts. For example, FundStrat, a global advisory firm noticed a rise in ether's (ETH) put/call ratio since the beginning of the year, which means option traders have started to hedge against further price declines.

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Bitcoin (BTC) has been roughly flat over the past week, struggling below $40,000, which is the midpoint of a three-month price range. Technical indicators show a decline in upside momentum over the past month, which could increase the risk of a price breakdown. That means upside could be limited going forward.

For now, analysts expect higher volatility in cryptos, tracking moves in equity markets.

"Bitcoin has seen relative strength neutralize versus ether, perhaps reflecting indecisiveness among investors who are confused as to whether the risk-off in equities will be a bigger drag on cryptos," Katie Stockton, managing partner at Fairlead Strategies, a technical research firm, wrote in a research note.

Long-term bitcoin holders are starting to take some profits, which has been a source of selling pressure over the past few months.

The chart below shows the recent decline in the cost basis of long-term holders overlaid with the average selling price (currently around $38,000, indicating zero profit).

So far, profit taking among long-term holders is occurring at the most significant rate in bitcoin's history, according to Glassnode data. "This indicates that long-term holders from the 2021-2022 cycle are capitulating, spending and redistributing their coins, specifically during the last three months," the firm wrote in a blog post.

For short-term holders, realized losses are much worse. "The on-chain cost basis of short-term holders is at $46,910, putting the average coin held by this cohort at an unrealized loss of -17.9%," Glassnode wrote.

Currently, about 70% of all BTC holders are in profit (30% held at a loss). In previous crypto bear markets, between 45%-57% of the market was in profit, according to Glassnode's data, which suggests more time before a price low is reached.

Some traders are betting on higher short-term volatility because of the uncertainty over BTC's price direction and lingering macroeconomic risk.

"It is likely that front-end implied volatility will rally into Fed decision, but this could be an opportunity to sell volatility as we expect the mean-reversion to happen very quickly into the end of the week," QCP Capital, a Singapore-based crypto trading firm, wrote in a Telegram announcement on Tuesday.

Most digital assets in the CoinDesk 20 ended the day lower.

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.