Market Deep Dive: Risk Reset – AI Shocks, Fed Steadies, and BTC Gathers Momentum 

 

The week kicked off with a sharp sell-off in risk assets as China’s DeepSeek AI model rattled market confidence. News of its capabilities spread over the weekend, raising concerns about US AI dominance and sending Nvidia down 17% in a single session. The AI-driven hysteria of 2024, which propelled Nasdaq to stretched valuations, is now facing macro headwinds of 2025: an uncertain Fed rate path, Trump’s trade threats, and shifting global liquidity conditions.

Crypto was not spared from the risk-off wave, with BTC dropping below USD 100,000, driven more by broader risk sentiment than any fundamental crypto factors. However, equities and crypto are now recovering from the lows and, as we discussed last week, the longer-term bullish trend remains intact. Often bull markets need a reset to clear out weak positioning, and this week’s volatility may have done just that.

Despite the market turbulence, institutional adoption continues to gain momentum. As we mentioned last week, the repeal of SAB 121 has removed a significant regulatory barrier for banks and large financial institutions looking to custody crypto assets, clearing the path for broader participation. Meanwhile, the Arizona State Senate Finance Committee approved the “Arizona Strategic Bitcoin Reserve Act”, allowing the state to allocate up to 10% of public funds into bitcoin and other digital assets – a major step towards government adoption and setting the stage for deeper capital flows into digital assets.

This week’s FOMC meeting was a key risk event of the week, initially sparking a hawkish reaction after the Fed removed “inflation making progress” from its statement. Markets took this as a signal of renewed inflation concerns, but Powell’s press conference softened the blow. The Fed remains data–dependent, with no urgency to cut rates, and Powell clarified that the removal of the inflation reference was not a policy shift, but simply a decision to shorten the phrase. Crucially for crypto, Powell reiterated that the Fed’s approach is oversight of banks, not suppression, easing fears of over-regulation.

Beyond the Fed, global macro conditions continue to shift. The ECB cut rates by 25 bps and signalled further cuts in Q1 2025, citing slowing economic growth and declining inflation. The Bank of Canada (BoC) also cut rates by 25 bps, while making a major policy pivot by ending quantitative tightening (QT) and announcing plans to restart asset purchases in March. However, the BoC also warned that a prolonged US-Canada trade war, following Trump’s recent threats of 25% tariffs on Canada and Mexico, could hinder growth while potentially reigniting inflation.

The US Dollar remains firm (DXY flat on the week), while 10-year yields are holding above 4.5% – this is still elevated, but a move lower towards December’s levels could provide renewed support for BTC and other risk assets. Liquidity constraints due to the Chinese New Year holiday also played a role in this week’s choppy trading, as reduced participation from Asian markets amplified price swings.

As we head into the month-end close, we expect additional volatility as funds rebalance. However, the bigger picture remains clear: improving liquidity, easing macro headwinds, and a more favourable regulatory climate continue to support the longer-term upside for BTC.

Key catalyst to watch today: PCE inflation data, which could shift rate expectations and set the tone for February trading.

After a week of volatility, BTC looks primed for what is coming next.

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