Macro & Rates Research Note: Policy Volatility and Crypto Asymmetry

Key Takeaways

• The 50% probability of a Trump 2024 exit is the market's most critical and under-hedged risk.
• Fed cut expectations (98% for 75bps) are a crowded consensus vulnerable to inflation data shocks.
• Crypto markets show high-volume, lottery-ticket interest in $130K+ BTC outcomes (1-2% prob) but see $80K as a strong floor (20% prob).
• Synthesis trade: Hedge political volatility via curve steepeners and reduce unhedged crypto beta ahead of event risk.

Executive Summary

The current prediction market landscape presents three dominant, interconnected narratives: extraordinary political volatility centered on the US presidency, overwhelming consensus on aggressive Federal Reserve easing in 2024, and a crypto price outlook characterized by high-conviction but low-probability bets on extreme upside. The 50% implied probability of President Trump leaving office before year-end (Kalshi: $9.8M volume) represents a profound and underpriced source of macro volatility. This political risk overshadows even the near-certainty of 75bps in Fed cuts (98% probability). Meanwhile, crypto markets show a striking asymmetry: substantial volume is chasing long-tail Bitcoin price targets ($130K+ at 1-2% probability), while the 'floor' is seen as a robust $80K (20% probability for 'How low will Bitcoin get this year?'). This suggests a market positioning for a 'policy put' and institutional adoption tailwinds, even amidst political uncertainty.

I. Political Risk Analysis: The 50% Presidential Exit

The 'Donald Trump out this year?' contract at a 50.0% probability with $9.8M in volume is the single most significant signal in our coverage universe. This is not a trivial speculation; it represents a market-implied coin flip on a change in the executive branch of the world's largest economy within a nine-month window.

• Implied Scenarios & Historical Context: A 50% probability this early in a presidential term is historically unprecedented in prediction markets. For context, similar markets for Presidents Biden or Trump in 2023 rarely breached 15-20% for an exit within the year. The elevation to 50% suggests markets are pricing in a non-standard exit pathway. This likely bundles several catalysts: (1) health-related incapacitation, (2) resignation under political or legal pressure, or (3) invocation of the 25th Amendment. The latter two have gained salience given the current polarized political environment and ongoing legal proceedings.
• Macro & Rates Implications: A 'Yes' resolution would trigger immense volatility. Immediate reactions would involve a steepening of the yield curve (near-term uncertainty vs. long-term policy shift expectations), a flight to quality bolstering the USD and Treasuries, and potential sell-offs in risk assets linked to Trump's policy agenda (e.g., certain crypto assets, deregulation-sensitive sectors). Vice President Harris's assumed succession would signal a dramatic pivot in regulatory and fiscal policy. Traders should hedge long-dated volatility (VIX futures, options) and consider positions in 2s10s curve steepeners. The extreme divergence from traditional political stability assumptions makes this the paramount macro risk for 2024.
• Contrast with Powell Stability: The minimal 1.0% probability for 'Powell leaves before 2026?' ($6.4M volume) underscores that political risk is viewed as exclusively presidential. Market confidence in Fed Chair Powell's tenure remains absolute, suggesting expectations for policy continuity at the central bank irrespective of White House turmoil. This creates a potential 'policy divergence' trade if political chaos contrasts with steady monetary policy normalization.

II. Monetary Policy: A Done Deal for Dovish Pivot

Markets have moved beyond questioning if the Fed will cut, to a high-conviction bet on the degree of easing. The 98% probability for 3 cuts (75 bps) ($5.2M volume) versus a mere 6% for 2 cuts (50 bps) ($4.6M volume) reveals an exceptionally skewed expectation.

• Analysis of Pricing: This is a dramatic consolidation of dovish sentiment. The market is effectively dismissing the Fed's own recent dot plot and rhetoric advocating patience. It prices in a central bank that will be compelled to act by deteriorating economic data—likely a softening labor market and inflation sustainably near 2%. The 98% level indicates this is treated as a base case, not a speculative bet.
• Trading Implications & Asymmetry: The risk/reward for outright longs on 3-cut contracts is poor given the saturated probability. The value lies in asymmetrical hedges. A position in the low-probability '2 cuts' contract (6%) could serve as a cheap hedge against 'hawkish' surprises (sticky inflation, resilient growth). Alternatively, given the 75bps base case, traders could look to markets predicting 4 or more cuts for leveraged upside if a recession scenario emerges. The sheer volume ($5.2M) behind the 3-cut view suggests a crowded trade; any shift in CPI or NFP data could cause rapid repricing and volatility in short-term rate futures (SOFR).
• Interaction with Political Risk: The juxtaposition of a 50% presidential exit risk and a 98% chance of 75bps cuts is jarring. Typically, such political instability would complicate the Fed's reaction function. The market appears to be concluding that the Fed will stay focused on its dual mandate, but a 'Yes' on the Trump exit could initially cause a flight-to-quality rally in bonds, accelerating the timeline for the first cut.

III. Digital Assets: Decoding the Asymmetric Crypto Landscape

Crypto markets exhibit a fascinating and consistent structure: high-volume, low-probability bets on extreme topside, coupled with a clearly defined and higher-probability floor.

• Upside Skew & 'Lottery Ticket' Positioning: Multiple high-volume contracts target Bitcoin milestones from $130K to $150K, all with probabilities between 1-2%. The $130K+ contract has a 1% probability and $9.7M volume—more volume than the 98% probable Fed 3-cuts contract. This indicates massive notional interest in the long-tail right of the distribution. These are not high-conviction probability bets; they are low-cost, high-payoff 'lottery tickets' expressing a view on positive tail-risk catalysts. These could include unexpected hyper-bitcoinization events, a dramatic ETF inflows surge, or a dollar crisis. The parallel Ethereum $5K+ contract (2%, $7.8M volume) shows this theme extends to major altcoins.
• Defined Downside & The Institutional 'Put': In stark contrast, the 'How low will Bitcoin get this year?' contract for $80,000.01 or above carries a 20% probability ($5.4M volume). This is a significantly higher probability than any of the extreme upside targets. It establishes $80K as a strong perceived support level—a floor bolstered by expected institutional buying (ETF flows), the upcoming halving's supply shock, and perhaps a perceived 'Fed put' from anticipated easing. The 11% probability for Bitcoin >$100K by end of 2025 offers a more realistic, medium-term bullish benchmark.
• Actionable Crypto Views: This structure suggests a strategic approach:
  1. Sell Volatility / Define Risk: The appetite for long-tail bets makes selling far out-of-the-money call options (or equivalent prediction market positions) potentially attractive for yield, given the rich premium embedded in those 1-2% probabilities.
  2. Focus on the Core Narrative: The base case appears to be a consolidation above $80K with a 10-15% chance of a >$100K breakout within 18 months. Direct longs should be sized against the $80K implied floor.
  3. Monitor Political Catalyst: Crypto's status as a 'political asset' is heightened. A Trump exit ('Yes' on the 50% contract) could trigger short-term selling on regulatory uncertainty reversal, but might be quickly bought if viewed as removing a pro-crypto administration. This binary outcome is a major unhedged risk for crypto portfolios.

IV. Cross-Asset Synthesis and Trade Construction

The interconnectedness of these narratives is critical for portfolio construction.

• Primary Risk Axis (Trump Exit): This is the dominant, undiversifiable risk. A 'Yes' outcome likely causes:
  • Rates: Bull-flattening of the curve (rally in front-end on flight-to-quality, rally in long-end on growth fears). Trade: Long 10-Year Treasury Futures (ZN) as a hedge.
  • FX: USD strength (JPY, CHF may strengthen more). Trade: Long USD/risk-sensitive EM FX (e.g., USD/MXN).
  • Crypto: Sharp initial sell-off, followed by directional trade based on perceived regulatory impact under Harris. Trade: Reduce BTC/ETH beta exposure ahead of high-volatility event windows.
• Secondary Driver (Fed Cuts): This is the consensus liquidity narrative supporting risk assets. A breakdown (shift from 3 to 2 cuts) would:
  • Strengthen the USD, weaken gold and crypto (removing 'easy money' tailwind).
  • Cause equity multiple compression, particularly in rate-sensitive tech. Trade: Hold cheap hedge via '2 cuts' contract or short Nasdaq futures (NQ).
• Synthesis Trade – 'Political Storm, Steady Hand': Given the divergence between political (volatile) and monetary (stable) leadership expectations, consider a curve steepener (2s10s). Political chaos may force near-term cuts (bullish front-end), while long-term fiscal uncertainty and potential policy shifts under a new administration could lift term premiums (bearish long-end).

V. Key Catalysts & Risk Calendar

• Political/Legal Catalysts: Supreme Court rulings on presidential immunity, significant developments in ongoing legal cases, health disclosures, and high-stakes congressional hearings.
• Macro Data: Monthly CPI and PCE prints, Non-Farm Payrolls reports. Any consistent upward deviation from 2% inflation target will challenge the 98% 3-cut pricing.
• Crypto-Specific: Net inflows/outflows for spot Bitcoin ETFs, Bitcoin halving (April 2024), Ethereum ETF approval decisions, and major regulatory announcements from the SEC or CFTC.
• Fed Communication: All FOMC meetings, speeches by Chair Powell, and particularly any discussion on the Fed's reaction function to political instability.

Conclusion and Desk Recommendations

Prediction markets are flashing a clear warning on political stability while simultaneously expressing extreme confidence in monetary easing and a speculative frenzy for crypto's upside potential. The 50% probability on a Trump exit is too significant to ignore and warrants a strategic hedging overlay across all risk asset portfolios. The Fed pricing, while crowded, aligns with deteriorating macro fundamentals but is vulnerable to inflation surprises. The crypto market structure reveals a speculative bubble in outcomes but a disciplined consensus on downside support.

Desk Recommendations:

1. Priority 1: Hedge Political Binary Risk. Allocate to defined-outcome hedges like the '2 Fed cuts' contract or volatility instruments. Size down on directional bets sensitive to US political news.
2. Priority 2: Re-assess Crypto Longs. Given the defined $80K floor (20% probability), ensure crypto exposures are managed relative to that level. Consider selling far OTM calls to monetize the rich long-tail premium.
3. Priority 3: Prepare for Policy Divergence. Build watchlists for trades that benefit from a 'steady Fed, chaotic White House' scenario, particularly curve steepeners and quality/growth equity rotation.

The overarching theme for 2024 is one of asymmetric volatility: calm and consensus in monetary policy markets, versus a coin-flip on earth-shaking political change, with digital assets betting on a decoupled, exponential future. Navigating this requires a focus on non-correlated hedges and disciplined risk definition.

Market Analysis

Donald Trump out this year? ➡️

Current Probability: 50.0%

Binary, high-impact macro volatility event. Market is pricing non-standard exit pathways (health, legal, 25th Amendment). The 50% level suggests it is a core portfolio consideration, not a fringe risk. Volume indicates deep institutional interest.

Fed to cut 3 times (75bps) in 2024? 📉

Current Probability: 98.0%

Extremely crowded consensus view. Prices in economic softening sufficient to compel aggressive Fed action. Little room for additional bullish price movement; all risk is to the downside (hawkish repricing).

Bitcoin >$100,000 by end of 2025? 📈

Current Probability: 11.0%

A moderate-probability, medium-term bullish benchmark. More grounded than the 1-2% $130K+ bets. Reflects expectations for continued adoption and macro tailwinds over an ~18-month horizon.

Bitcoin floor $80,000.01 or above in 2024? 📈

Current Probability: 20.0%

A high implied probability for a specific price floor. Suggests strong conviction in institutional bid and halving support. Provides a key technical and psychological level for risk management.