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

Donald Trump's impending appearance at the Nashville Bitcoin conference has traders preparing for fat-tails – extreme or unusual price movements in the leading cryptocurrency.

Activity in the options market listed on Deribit and tracked by Amberdata shows a noticeable increase in the "butterfly index," which measures the volatility of the 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.

"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 scheduled 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. The grapevine is that 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."

Additional 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.