Author: Gyro Finance
The long-awaited interest rate cut has arrived as expected, but the market has not celebrated as usual.
On December 19 at midnight Beijing time, the Federal Reserve announced its last interest rate decision of the year, deciding to lower the federal funds rate target range by 25 basis points to 4.25%-4.50%, successfully achieving a third consecutive interest rate cut. So far, the cumulative decrease in this round of rate cuts by the Federal Reserve has reached 100 basis points.
Even with the existence of selling facts, liquidity release is a great boon for the risk market, but this time, it is different. The U.S. stock market first fell to pay respects, giving pricing through action. Choice data shows that as of the close on the 18th Eastern Time, the Nasdaq fell 3.56%, the S&P 500 index fell 2.95%. The Dow plunged by a thousand points, with a decline of 2.58%, marking the longest consecutive drop since October 1974 at 10 days.
The crypto market followed closely, with Bitcoin once dropping below $100,000, dipping to $99,000, and ETH experiencing a maximum decline of over 7.2%, while altcoins suffered an average drop of over 10%. Why did this interest rate cut lead to such results?
01 Hawkish expectations trigger market panic, Powell slaps Trump in the face.
An interest rate cut is a good thing, but risk market speculation revolves around two words — expectations. Federal Reserve Chairman Powell issued a long-awaited hawkish statement while announcing the rate cut, stating that the December rate cut decision is more challenging but is the 'correct decision,' emphasizing that the Federal Reserve will 'be more cautious' when considering future adjustments to the policy rate. Whether the Federal Reserve will cut rates in 2025 will be based on future data, not current forecasts, and the Federal Reserve will consider further cuts only after inflation improves.
Compared to the relatively consistent voting in the past, this interest rate cut has also encountered divergences. Cleveland Fed President Harker voted against the rate decision, believing that this interest rate cut should be skipped, reflecting that the resistance to cutting rates is continuing to grow.
On that day, the economic outlook announced by the Federal Reserve showed an upward adjustment in economic growth rates and a downward adjustment in unemployment rates, also reflecting the Federal Reserve's hawkish stance. From the dot plot, based on this outlook forecast, among the 19 members of the Federal Open Market Committee, 10 believe that by the end of 2025, the federal funds rate target range will drop to between 3.75% and 4%. Considering the so-called 'more cautious' stance, based on 25 basis points, the Federal Reserve seems to be able to cut rates at most twice next year, a significant reduction compared to the 4 cuts expected in September.
Against this backdrop, the U.S. stock market, which had already digested the news of the December rate cut, experienced a significant drop, which is understandable, as the soft landing of the market remains to be assessed. In fact, from a macro perspective, the severity is still within a controllable range. Despite the initial emergence of hawkish statements, the consensus on rate cuts in 2025 remains, albeit with a slight increase in neutral rates. From the Federal Reserve's perspective, this hawkish statement is likely a preemptive warning to cope with the uncertainties posed by Trump's subsequent governance, reserving some space to prevent inflation from rising due to Trump's policy propositions.
Although the expectation of rate cuts significantly impacts the risk market, the disasters in cryptocurrency are even greater. A single statement from Powell caused Bitcoin to drop more than 5% and further brought down the crypto market. According to Coinglass data, as of 5 PM, over 260,000 people globally were liquidated in the past 24 hours, with a total liquidation of $780 million, including $661 million in long liquidations and $118 million in short liquidations.
At the press conference, when Powell was asked whether the Federal Reserve would establish a Bitcoin national reserve, he replied, 'We are not allowed to own Bitcoin. The Federal Reserve Act specifies what the Federal Reserve can own, and it does not seek to change that. This is a matter Congress should consider, but the Federal Reserve does not wish to amend the law.'
Powell's attitude undoubtedly reflects an opposition to cryptocurrency. The Federal Reserve does not consider including Bitcoin in its balance sheet and does not wish to discuss the issue. During this term, Powell has clearly stated that he will not resign, and Trump does not have the power to replace him.
Coincidentally, not long ago, Trump also made his usual 'greatness' statement, saying he would do great things in the cryptocurrency field. When asked if the U.S. would establish a Bitcoin strategic reserve similar to oil reserves, he bluntly stated, 'Yes, I think so.' Earlier, an anonymous transition team insider revealed that Trump hopes to drive Bitcoin above $150,000 during his term because cryptocurrency is 'another stock market' to him. Given Trump's clear statement that 'the stock market is everything,' this news has a high degree of credibility.
On December 17, market news came again stating that Trump plans to establish a strategic Bitcoin reserve (SBR) through an executive order, planning to use the Treasury's Exchange Stabilization Fund (ESF) to purchase Bitcoin, and this asset has now exceeded $200 billion. On the same day, the Bitcoin Policy Institute drafted the full text of this executive order and stated that the order could take effect immediately after Trump's signing during his term.
In light of a series of stimulating messages, the Bitcoin national reserve plan seems just within reach, and the market has high hopes for it, with the voting on Bitcoin reserves on Polymarket increasing from 25% to 40%. Yesterday, Bitcoin soared all the way up, at one point hitting the new threshold of $110,000. However, Powell's remarks at this time undoubtedly slap Trump in the face; if the Federal Reserve does not cooperate, the so-called national reserve will clearly face significant obstacles.
02 The Federal Reserve's lack of intention makes Bitcoin national reserves face numerous difficulties.
Taking the Bitcoin bill proposed by Senator Cynthia Lummis as an example, this bill requires the government to purchase up to 200,000 Bitcoins each year for 5 years, with a total of 1 million. Based on a price of $100,000 per Bitcoin, excluding premiums during purchases, the government would need to raise at least $100 billion. In terms of operational details, the funding sources could consist of three parts: first, using the Federal Reserve's Treasury remittances, up to $6 billion per year. This plan is less likely because the Federal Reserve's balance sheet is still in a loss position, with losses exceeding $200 billion. In fact, since September 2023, the Federal Reserve has not remitted any funds to the Treasury. Second, transferring from the Federal Reserve's capital surplus account to the Treasury's general fund. This method has been used in the FAST Act (Fixing America's Surface Transportation), but if used to purchase Bitcoin, it is highly likely to raise public concerns about the independence of the Federal Reserve.
Compared to the first two options, the third option is more feasible, which is to adjust the fair value of gold according to market prices, allowing the Federal Reserve to market the gains from the official value of the Treasury's gold reserves. According to the Federal Reserve's published financial report, its official reserve assets include gold, special drawing rights, and coins, among which gold refers to the Treasury's gold dollar-denominated certificates. Based on the official price of slightly above $42.22 per troy ounce, the nominal price is $11 billion. If calculated at the market price of $2,700, this reserve would reach $703.4 billion. In fact, considering the three methods, regardless of how Bitcoin is purchased, the U.S. Treasury needs the strong support of the Federal Reserve.
On the other hand, U.S. national reserve assets need to possess high liquidity to help maintain the dollar's status as an international reserve currency and serve as a last resort payment method. From this perspective, the highly volatile Bitcoin seems to be incompatible with these standards. If the U.S. government significantly purchases Bitcoin, although it would further drive up its price, it would highly concentrate Bitcoin within the government side. When it comes time to sell in large amounts, the slippage and volatility would have significant impacts, potentially leading to substantial impairment losses for the government. Moreover, the rise of non-sovereign currencies may somewhat weaken global recognition of the dollar.
Under the accumulation of various reasons, the Federal Reserve's deep-seated dislike for cryptocurrency is evident, with Powell having repeatedly expressed opposition to cryptocurrency in the past. Notably, in this statement, Powell also left room, stating, 'This is something Congress should consider,' meaning Congress could modify the bill to include Bitcoin in reserves, but considering the complex interests entangled and the broad impact, the possibility of functional modifications is minimal.
This is why the credibility of Forex Stabilization Fund purchases is relatively higher. Unlike the Federal Reserve's path, this fund is under the U.S. Treasury, which can bypass Congress for appropriations with the president's consent, directly using ESF for trading in gold, foreign exchange, and other credit and security instruments, making its use relatively flexible.
Overall, although Trump has gained control of both houses during this term and power has become highly centralized, he himself has actively proposed relevant plans. However, from a probabilistic perspective, the possibility of Bitcoin becoming a strategic reserve asset for the United States remains very low. Nevertheless, for the unconventional Trump, anything is possible. After all, from a realistic point of view, the U.S. government already holds over 210,000 Bitcoins, ranking first among global governments. If a partial reserve is realized, the appreciation of Bitcoin could play a very positive role for the heavily indebted United States.
03 Institutional FOMO rises, the crypto market cannot escape the path differentiation.
In the long run, despite briefly experiencing Black Thursday, the crypto market's outlook remains bright under foreseeable regulatory benefits. As for the upcoming 2025, institutions are also showing highly optimistic sentiments.
Bitwise provided clear price data in its 2025 forecast, stating that the number of countries holding Bitcoin will double, Bitcoin ETFs will see more inflows, Bitcoin will reach $200,000, and if strategic reserves are realized, there is no upper limit, potentially reaching a price of $1 million by 2029. Ethereum will experience a narrative shift in 2025, reaching $7,000 driven by Layer 2, stablecoins, and tokenization projects, while Solana aims for $750. Additionally, it stated that 2025 will be the year of IPOs for crypto enterprises, with Coinbase becoming the largest trading broker.
VanEck's expectations are clearer at this stage, stating that the cryptocurrency bull market will continue to develop in 2025 and will reach its first peak in the first quarter. During this peak period, Bitcoin's price is expected to be around $180,000, while Ethereum's price will exceed $6,000. Other notable projects, such as Solana and Sui, may break through $500 and $10 respectively. After the first quarter, BTC's price is expected to correct by 30%, with altcoins experiencing even larger declines of up to 60%. The market will consolidate in the summer and then rebalance in the fall, with major tokens regaining growth and reaching previous historical highs by the end of the year.
Compared to Bitwise, VanEck is more optimistic, believing that Bitcoin reserves will become a reality, and the federal government or at least one state (such as Pennsylvania, Florida, or Texas) will establish Bitcoin reserves. It also expects the number of countries utilizing government resources for mining to increase from the current 7 to double digits. On the other hand, VanEck has also made predictions for sub-sectors, believing that stablecoins, DeFi, NFTs, Bitcoin Layer-2, RWA, and AI agents will all see rapid development. By 2025, DEX trading volume will exceed $40 trillion, accounting for 20% of CEX spot trading volume; NFT trading volume will reach $30 billion; Bitcoin Layer-2's locked value (TVL) will reach 100,000 BTC; the total value of security tokenization will exceed $50 billion; and on-chain activities of AI agents will also exceed 1 million.
Presto's predictions are also consistent, stating that if Bitcoin's price reaches $210,000, the ETH/BTC ratio will rebound to 0.05, Solana will break through $1,000, and a sovereign nation or S&P 500 company will include Bitcoin in its treasury reserves.
From last year's predictions, VanEck's prediction success rate was about 56.6%, while Bitwise was around 50%. Thus, from the institutional perspective, the credibility is quite good. Overall, around $200,000 is the peak expected by institutions for Bitcoin in the coming year, while Ethereum is around $6,000 to $7,000, indicating a very strong bullish sentiment among institutions.
However, from the current obvious path differentiation, despite the seemingly beautiful bull market, risks remain ubiquitous, especially for altcoins, which are most susceptible to the effects of liquidity. In fact, even now, many altcoin holders find that prices have not even returned to previous bear market levels.
The lack of market liquidity can also be seen from Binance's new tokens; the 'universe exchange' effect is continuously weakening, with surges followed by retracements becoming the main theme. According to statistics from Gyro Finance, as of December 19, the average decline of the 10 new tokens launched on Binance since November exceeds 57.94%. Taking PENGU, which just launched on December 17, as an example, it soared to 0.07 after going live but quickly retreated, now reported at 0.033, with a decline of 51.81%.
It is precisely because of market dilemmas and numerous doubts that Binance Wallet recently launched the Binance Alpha feature, hoping to invigorate trading volume by opening up low market-cap potential tokens and stimulate wallet ecology to maintain its leading advantage in fierce market competition. However, from the current situation, the short-term increase in platform activity is evident, but the long-term effects remain to be discussed.
In this regard, holding mainstream tokens may be the best choice in this bull market. Currently, the crypto market has rebounded, with Bitcoin reported at $101,652 and ETH at $3,674.
