Japan’s finance minister, Kato, announced plans to foster a welcoming environment for crypto assets. He noted that these assets could enhance diverse investment portfolios. Kato’s remarks hint at the possible integration of crypto assets into broader investment strategies. However, given Kato’s previous actions, the effects on the crypto market might not be as positive as some hope.

Sell The News Setup

The finance minister’s statement is setting up a typical “sell the news” scenario for derivative traders. Although the news sounds encouraging, the phrase “appropriate environment” is unclear. Considering Kato’s conservative financial background, it likely signals more regulations and taxes ahead. We should approach any initial price increase from this news with caution. This uncertainty is leading to higher implied volatility, with front-month Bitcoin options volatility rising from 48% to 52% in just 24 hours. This indicates that buying straddles or strangles, which gain from significant price movements in either direction, may be a smart strategy in the coming weeks. The market is anticipating a major shift once the details of Japan’s new framework are revealed. For those already holding long positions, this is a strong indication to buy protective puts. The put/call ratio on major exchanges has increased to 0.65 from 0.58 last week, showing a growing interest in downside protection. Hedging now is more affordable than waiting for the first draft of the regulations.

Market Reaction

Reflecting on the response following U.S. regulatory clarifications in 2024, there was an initial price surge, followed by a sharp drop when compliance costs became clear. History shows that government actions, even when framed positively, often limit the market’s speculative aspects in the short term. We should expect a similar market reaction this time. We will be closely monitoring funding rates for perpetual swaps and open interest on futures contracts related to Japanese yen pairs. A rise in negative funding could indicate that shorts are increasing, which might set the stage for a short squeeze if the news is unexpectedly positive. For now, the safest approach is to brace for volatility instead of counting on a steady upward trend. Create your live VT Markets account and start trading now.

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