Interest rate cuts slow down, is the crypto market entering winter again?

Author: 1912212.eth, Foresight News

On December 17 last year, the cryptocurrency market showed a downward trend following Powell's hawkish remarks. Fast forward to this Tuesday, official data showed that U.S. employment figures were better than expected, and service sector inflation accelerated. These two data points quickly cooled market expectations for a Federal Reserve rate cut, with the market generally anticipating that there may only be one rate cut this year. As a result, Bitcoin fell again from above $100,000 to a low of $92,500, while Ethereum dropped from $3,700 to a low of $3,208.

Altcoins were broadly affected, with some experiencing significant declines. Between January 7 and 8, certain altcoins erased all gains since January 1. In the 24-hour decline, the DeFi sector saw USUAL drop by 11%, ENA by 6%, and PENDLE by 9%. Meme coins WIF and PEOPLE both fell by over 8%, while layer 2 public chains like APT, TIA, and ADA saw declines around 5%. MOVE dropped over 9%. In the AI sector, VIRTUAL fell by over 6%. WLD and ARKM saw declines around 5%.

Contract data indicated that $556 million was liquidated in the past 24 hours, with $418 million in long positions liquidated, and the largest single liquidation was $15.299 million.

Bitcoin spot ETF data has seen a net inflow for three consecutive days since January 3, with net inflows exceeding $900 million on January 3 and January 6. Ethereum spot ETF data, however, has been mediocre, with net outflows on January 2 and January 7, while net inflows were recorded on January 3 and January 6, resulting in a slight net inflow for the month. However, according to Trader T data, on January 8, the U.S. Bitcoin spot ETF saw a net outflow of $569 million, and Ethereum had a net outflow of $159 million, which undoubtedly exacerbated the already illiquid market.

In terms of stablecoin data, since January 1, the market cap of USDT has been decreasing but has started to recover, currently hovering around $137.5 billion.

USDC data, on the other hand, has performed well, rising from $43.95 billion to a peak of about $46 billion, with a net inflow of over $2 billion. USDC is primarily held by U.S. users, which may indicate that U.S. capital strength is still buying.

Why are market prices continuously declining?

$6.5 Billion Worth of Bitcoin from Silk Road Approved for Sale

On the morning of January 9, an official confirmed to DB News that the U.S. Department of Justice has been authorized to liquidate 69,370 BTC (worth about $6.5 billion) seized in the Silk Road case. The DOJ requested permission to sell these assets due to Bitcoin price volatility. When asked about the next steps, a DOJ spokesperson stated, "The government will take further action based on the judgment in this case."

As a result of this news, Bitcoin briefly fell over 1%, but quickly rebounded to around $94,000.

Currently, the U.S. Department of Justice has not determined when to sell. Additionally, there are only 11 days left until Trump officially takes office, and he previously stated that he would not sell any Bitcoin after taking office.

According to the latest data from Arkham, U.S. government addresses currently hold 198,109 Bitcoins, worth about $18.59 billion; they also hold 54,753 Ethereum, worth about $181.3 million.

Significant Decrease in Federal Reserve Rate Cut Expectations

On the evening of January 8, the U.S. ADP employment figures for December recorded 122,000, falling short of the market expectation of 140,000, marking the lowest level since August 2024. The number of initial jobless claims for the week ending January 4 was recorded at 201,000, the lowest since the week of February 17, 2024. These two data points further indicate the strength of the U.S. market economy, leading to a further decline in rate cut expectations.

In the early hours of January 9, the Federal Reserve's meeting minutes indicated that committee members expect the pace of rate cuts in 2025 to slow significantly, with only a 75 basis point cut expected for the entire year. Market futures prices suggest that the degree of policy easing in 2025 may be slightly lower than this expectation. Nevertheless, market participants still harbor considerable uncertainty regarding the path of the federal funds rate over the next year.

When discussing inflation developments, attendees noted that although inflation has significantly slowed from its peak in 2022, it remains elevated. They commented that overall inflation rates are slowing in 2024, with some recent monthly price readings exceeding expectations. Despite this, most indicated that progress on inflation remains evident across a broad range of core goods and services prices.

Federal Reserve Governor Waller stated on Wednesday that although inflation is expected to stagnate above the 2% target by the end of 2024, based on market expectations and short-term inflation data, the inflation situation in the U.S. continues to improve. He anticipates that inflation will continue to decline in 2025, supporting further rate cuts. Waller emphasized that the fundamentals of the U.S. economy remain robust, and the labor market shows no signs of significant weakness. There is considerable disagreement among Federal Reserve officials regarding the number of rate cuts in 2025, ranging from zero to five. He believes that despite calls for a slowdown or pause in rate cuts due to slow inflation progress, medium-term inflation will continue to move toward the 2% target, making further rate cuts appropriate.

According to CME FedWatch data, the probability of the Federal Reserve maintaining interest rates in January is 95.2%, while the probability of a 25 basis point cut is 4.8%. The probability of maintaining the current rate in March is 60.9%, with a cumulative probability of a 25 basis point cut at 37.3% and a cumulative probability of a 50 basis point cut at 1.7%.

As the probability of a Federal Reserve rate cut decreases, market liquidity injections are slowing, and market prices are struggling to rise. The consumer price index inflation data set to be released on January 15 may cause significant fluctuations in the cryptocurrency market.

Future Trends

The correlation between Bitcoin and the SP 500 index has risen to 0.88, indicating a synchronization between the two markets, marking a shift from the previous divergence trend (since Trump's election, Bitcoin has risen by 47%, while the SP 500 index has only risen by 4%).

Andre Dragosch, Head of Research at Bitwise Europe, attributes the re-emerging correlation to macroeconomic factors, including the Federal Reserve's revised rate cut forecasts and the strengthening dollar, which continue to pressure both cryptocurrencies and traditional markets. Despite Bitcoin having strong on-chain support, its price movements are increasingly influenced by broader market trends, indicating potential short-term risks.

Matrixport's chart report suggests that fluctuations in global liquidity may exert some pressure on Bitcoin, as historical data shows that changes in liquidity typically lead Bitcoin price movements by about 13 weeks. With the dollar strengthening after Trump's re-election, global liquidity measured in dollars has begun to tighten, suggesting that Bitcoin may enter a consolidation phase in the near term.

However, this consolidation is expected to be a temporary phenomenon. Overall, risk assets (especially Bitcoin) still exhibit positive long-term potential. Nevertheless, in a weaker liquidity environment, traders should exercise greater caution, as these indicators have historically proven to be reliable market barometers.

Cauê Oliveira, Head of Research at Blocktrends, stated today that Bitcoin's price fell after reaching an all-time high at the end of 2024, when institutional investors sold a large amount of Bitcoin, but now they are starting to buy Bitcoin again at prices below $100,000.

Data shows that in the week following December 21, wallets holding 1,000 to 10,000 BTC sold 79,000 BTC, but after Bitcoin's recent pullback, this group began accumulating again when Bitcoin's price fell below $95,000.