Bitcoin Traders Brace for \'Fat Tails\' as Focus Shifts to Trump\'s Nashville Bitcoin Conference Speech

Speculation is high that Trump will announce a bigger role for BTC in the financial system, triggering a parabolic rise in the cryptocurrency's price, one observer said.

Bitcoin traders are bracing for extreme price movements as anticipation builds for Donald Trump's appearance at the Nashville Bitcoin conference, where speculation is rife that the former U.S. president will announce a significant role for BTC in the financial system.

Activity in the Deribit options market, tracked by Amberdata, shows a noticeable increase in the "butterfly index." This index measures the volatility of out-of-the-money (OTM) 25-delta (∆25) call and put options listed at a distance from the going market price of bitcoin [{{BTC}}] relative to at-the-money (ATM) options closer the spot price.

The spike in the index indicates expectations for more extreme market movements.

"This week we’re going to hear Trump speak at the Nashville Bitcoin conference. As long as Trump remains a front-runner, this is a potential catalyst for "something to happen” this week. The derivative markets seem to agree, and we’re seeing pricing support the “something is about to happen” narrative," Greg Magadini, director of derivatives at Amberdata, said in an email to CoinDesk on Monday.

"Something we don’t often talk about, but merits a shoutout this week, is the spike higher in 25-delta wings versus ATM volatility. This type of activity in the options market reflects the anticipation for higher return distribution Kurtosis or fat tails," Magadini added.

Options are derivative contracts that protect the buyer from bullish or bearish price movements. A call offers protection from bullish moves, while a put is insurance against price slides. Calls at strikes above BTC's going market rate are said to be OTM, while puts below the going rate are said to be OTM.

Traders typically buy OTM options when preparing for unexpected market movements, pushing the butterfly index higher.

Hence, trading desks typically use the term "butterfly" to indicate the extent of change in the volatility smile or the volatility profile of options at various strike levels and expiration dates. When butterflies become costly, it suggests that the volatility smile has steepened, a sign of the potential for extreme or unexpected events to affect market outcomes.

Trump is set to speak at the Nashville conference on July 27, despite the recent assassination attempt that boosted his chances of winning the Nov. 4 Presidential elections.

According to the grapevine, Trump might announce a more significant role for BTC in the U.S. financial system.

"Speculation is high that he will announce bitcoin as a strategic reserve asset, which could trigger a parabolic rise in bitcoin's price," Markus Thielen, founder of 10x Research, said in Monday's edition of the newsletter. "Taking profit, or even shorting bitcoin ahead of Trump’s Nashville speech, could turn out to be an expensive exercise."

Other factors, such as the expected debut of spot ether ETFs in the U.S., also explain the rise in the butterfly index.

"Traders and market makers are worried about tail risks from the FOMC on July 31 and the upcoming spot ETFs, which has pushed up the pricing for BTC's tail risks [butterfly index]," Griffin Ardern, head of options trading and research at crypto financial platform BloFin, told CoinDesk.

Tail risk refers to the risk of unexpected events that occur outside the normal distribution of returns.

This week, traders will also receive advance estimates of the U.S. GDP growth for the June quarter of 2024, the Fed's preferred inflation measure, and the core PCE prices, durable goods, and retail sales for June. All these numbers will likely influence Fed rate cut expectations and demand for risk assets, including BTC.

CoinDesk’s Markets team covers all aspects of cryptocurrency trading including spot, derivatives, and over-the-counter (OTC) markets.

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