What are the reasons for this round of crypto market crash? What do industry insiders say?

Deng Tong, Golden Finance

At 3 a.m., the Federal Reserve announced its interest rate decision and a summary of economic expectations, followed by a monetary policy press conference held by Federal Reserve Chairman Powell at 3:30 a.m. Although altcoins rebounded after the previous three FOMC meetings, the market continued to fall after the Fed officially announced a 25 basis point rate cut.

What caused this round of crypto market decline? What is the future trend of the Federal Reserve's policy? What do industry insiders think of the current market situation?

1. Risk aversion mode after the high point

According to Coingecko data, the price of BTC reached a historical high of $108,135 on December 17.

Then, on December 18, the price of Bitcoin once wiped out about 5% of its gains to $103,765. The decline of Bitcoin triggered panic selling among crypto investors, and cryptocurrencies fell across the board.

The massive liquidation in the derivatives market accompanied the downturn in the crypto market. $78.09 million of BTC was liquidated and $55.65 million of ETH was liquidated, and the crypto market was in a bloodbath.

Total cryptocurrency liquidations. Source: CoinGlass

The dominance of long liquidations suggests that the crypto market is overleveraged on the bullish side, mainly due to profit-taking and risk-off mode ahead of today's Fed rate cut decision.

Before this FOMC meeting, sellers had already dominated the market, and the seller pressure reflected the typical risk aversion before the event, and BTC cooled down.

In addition, the continued adjustment of the crypto market also reflects the weakness of the US stock market. On December 17, the S&P 500 fell 0.4% to close at 6050.61 points, and the Nasdaq Composite fell 64 points. The Dow Jones Industrial Average fell for the ninth consecutive trading day, the longest losing streak since 1978, closing down 0.61% at 43,339 points on December 17.

US Stock Market 24-Hour Performance Source: Financial Visualizations

Ahead of the FOMC meeting, market participants have focused on the Fed's rate cut decision. The Fed's last interest rate decision in 2024 is a complex and highly volatile event.

Second, the interest rate was cut by 25 basis points, but Powell made hawkish remarks

This morning, the Federal Reserve's annual interest rate decision for 2024 came to an end. The bank decided to cut the benchmark interest rate by 25 basis points to the range of 4.25%-4.50%, which was the third consecutive interest rate cut, in line with expectations. In the eight resolutions this year, the Federal Reserve has cut interest rates by a total of 100 basis points, including one 50 basis point cut, two 25 basis point cuts, and another five times of keeping interest rates unchanged.

According to the median of the Federal Reserve's December dot plot, the Federal Reserve expects to cut interest rates twice in 2025, each by 25 basis points, and four times in September, each by 25 basis points; the Federal Reserve expects to cut interest rates twice in 2026, each by 25 basis points, which is consistent with the expectations in September. The median forecast for the federal funds rate at the end of 2025 is 3.9%. The previous forecast in September was 3.4%.

Powell's announcement that the Federal Reserve will only cut interest rates twice more in 2025 is undoubtedly hawkish to the market. In addition, the Federal Reserve Committee also raised its inflation forecast for 2025 from 2.1% to 2.5%.  

Some analysts believe that this is because Trump's inauguration will bring some policy adjustments, such as increasing tariffs on many countries, expelling millions of undocumented workers, and expanding fiscal deficits. Powell emphasized at the press conference that the Fed's policy readjustment is a signal that the central bank is ready to adjust its policies according to the needs of the US economy.  

Powell also said that geopolitical turmoil remains a risk. There is great uncertainty in the forecast of the economy in the next three years.

In response, Gennadiy Goldberg, head of U.S. interest rate strategy at TD Securities, said: The Fed has sent a signal that they will not be as dovish as in the past, and they tend to have fewer rate cuts next year. I think this is a signal that the market will continue to price in less than two rate cuts, and if the data is strong enough, it may move towards zero rate cuts. If the Fed does not see inflation falling to a sufficient degree, they are reluctant to continue to cut interest rates.

"Federal Reserve mouthpiece" Nick Timiraos pointed out: The addition of the wording "magnitude and time" to the Fed's policy statement implies that the pace of rate cuts will be slowed to modify potential adjustments.

Swan Bitcoin Managing Director John Haar said: The move to finally lower interest rates and hint at fewer rate cuts next year indicates that future interest rates will be relatively hawkish.

Affected by the Fed's hawkish remarks, U.S. interest rate futures pricing The Fed will cut interest rates by about 49 basis points in 2025, close to the 50 basis points predicted by the Fed's dot plot, and the market pricing rate cut was 75 basis points before the interest rate decision was announced.

Not only is there an expectation of a rate cut, but Powell also made it clear on the question of whether Trump will build up Bitcoin reserves: the Fed has no intention of holding Bitcoin. "We are not allowed to hold Bitcoin," Powell said at a press conference after the FOMC meeting. As for the legal issues of holding Bitcoin, Powell said, "This is something for Congress to consider, but we have no intention of seeking to change the law."

3. How do industry insiders view the current crypto market?

Regarding the short-term prediction of Bitcoin prices, cryptocurrency analyst Skew said that BTC's decline "cleared the position in both directions" because longs were stopped out and "shorts took profits."

Placeholder partner Chris Burniske said in a post on X: "If you are upset that you didn't sell before the market correction after the Fed's FOMC meeting, please understand that you don't actually have much advantage in predicting market reactions. Take this experience as an opportunity to slow down. Don't over-trade. In the long run, just be patient and you'll be fine."

Andre Dragosch, head of European research at Bitwise, pointed out: "I think the biggest trouble for the Fed right now is that despite the Fed's interest rate cuts, the financial environment is still tightening. Since September Since January, long-term bond yields and mortgage rates have been rising, and the dollar has appreciated, which also means a tightening financial environment. The continued appreciation of the dollar also poses macro risks to Bitcoin, because the appreciation of the dollar is also associated with a contraction in the global money supply, which is often unfavorable to Bitcoin and other crypto assets. In fact, the Fed's net liquidity continues to decrease. In my opinion, tightening liquidity and a stronger dollar are also the biggest risks facing BTC... On the other hand, BTC's on-chain factors continue to be very favorable, especially the continued decline in exchange balances, which supports the hypothesis that the BTC supply gap continues to intensify. "

According to Coinglass data, in the past 24 hours, the total amount of liquidation on the entire network reached US$120 million, of which the amount of long orders liquidated was about US$109 million and the amount of short orders liquidated was about US$11.0841 million.

As of press time, the price of BTC fell below US$100,000 to US$99,422.12, a 24-hour drop of 5.8%.

The price of Ethereum fell below the $3,600 mark to $3,594.01, a 24-hour drop of 7.3%.

Source: CoinTelegraph, CoinDesk, X, Coingecko, Jinshi Data, Golden Finance