This week it has been all about the Fed and Powell’s hawkish rhetoric that jolted risk assets and sent shockwaves through both traditional markets and crypto. BTC tumbled, equities fell, and traders faced a painful reality check on rate expectations. The long-anticipated pivot to lower rates now seems further away, and traders paid the price for their optimism.
Here’s what happened:
- Fewer Rate Cuts: Whilst the Fed did indeed cut rates by 25bps, it now predicts only 2 rate cuts in 2025, a downgrade from the previously expected 4.
- Inflation Target Delayed: The goal of bringing inflation back to 2% has been pushed out to 2027 (from 2026).
- No BTC for the Fed: The central bank is legally prohibited from holding BTC on its balance sheet, a blow to any lingering hopes of institutional BTC adoption by the Fed.
Markets did not take kindly to the news. BTC, which had recently hit a new all-time high just above USD 108,000, retreated swiftly to around USD 103,000 level with further selling pressure pushing it down to the lows around USD 95,000 this morning. The sell-off was not contained to BTC with other majors and altcoins suffering double digit losses, and caught in the broader wave of panic. The broader crypto sell-off triggered another liquidation cascade with over USD1.2 billion wiped out with bulk of this coming from over-leveraged long positions according to data from CoinGlass.
This hawkish tilt extended beyond the Fed. The Bank of Japan maintained rates this week as well but hinted at tightening in 2025, marking a potential end to decades of ultra-loose policy. Meanwhile, the Bank of England also stayed pat, holding rates steady at 4.75%. Central banks worldwide seem aligned in their caution, amplifying pressure on risk assets and serving a harsh reality check for the markets.
While the market reaction may seem like an overreaction, it is important to note that overextended positioning played a significant role. This pullback, though painful, represents a healthy recalibration. Adding fuel to the fire, reports of MicroStrategy blackout period in January mean that the company may not be able to continue its aggressive BTC purchases. Additionally, you also have liquidity slowly draining from the market as the holiday season approaches, making sharp price swings more likely.
As we look ahead, stay vigilant and keep an eye on upcoming economic data, as history tells us that we are just one bad data print away from markets reversing course. The stage is set for more favourable crypto environment going forward and the bigger picture has not changed. With the last major risk event now out of the way, conditions are primed for the bull market to roar to life once again.
Until then, stay sharp, stay informed, and enjoy the ride.
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