The Federal Reserve Open Market Committee (FOMC) meeting was the main event causing volatility in the cryptocurrency market over the past week. Chairman Powell emphasized that the Fed cannot buy Bitcoin as a strategic reserve asset based on the law. The Fed's interest rate dot plot also revealed that interest rate cuts in 2025 will decrease from four times to two, prompting the market to re-evaluate the price corrections of risk assets.
Bitcoin fell from a high of $107,000 to a low of $94,000, while other major currencies like ETH, DOGE, ADA, AVAX, etc., experienced even more severe declines. Most coins had double-digit daily drops, with ETH also falling below the $3,500 support level, and XRP dropping below $2.20. Other DeFi tokens like LINK and DOT also fell across the board, leading to over 330,000 highly leveraged traders being forcibly liquidated within 24 hours, with total liquidations exceeding $1 billion.
However, the main force behind this sell-off is not the cryptocurrency market itself, but the capital flow of Bitcoin spot ETFs shifting from buying to selling. According to Farside data, on December 19, the Bitcoin ETF experienced a record single-day capital outflow, with net outflows reaching $672 million. Among them, Fidelity's FBTC and Grayscale's GBTC withdrew $208.5 million and $188.6 million, respectively, being the largest sources of capital outflow.
Ethereum ETFs also did not escape, with a net outflow of $60 million on that day. Although this amount is far lower than that of Bitcoin spot ETFs, the price of Ethereum still fell by more than 9%, currently hovering around $3,400. The overall market shows an increase in investor risk-averse sentiment, with significant capital withdrawing from risk assets, temporarily interrupting Bitcoin's continuous rise since Trump's election. Investors are also re-evaluating whether Bitcoin's price is worth the high price of $100,000.
The market is currently reevaluating cryptocurrencies against other U.S. stock risk assets based on different interest rate benchmarks, with significant price corrections. This correction will not last long, as the Fed's delay in interest rate cuts is merely a false topic and not the main factor affecting Bitcoin and cryptocurrency's upward trend. This downward adjustment helps cool down the previous overly optimistic sentiment. If the price remains around $100,000, it indicates that Bitcoin's price resilience has formed, and investors do not need to worry too much.
Focus on the subsequent trends of DeFi tokens.
The Fed's adjustment of the interest rate dot plot for 2025 will not affect Bitcoin's price trend in the medium to long term. Although the pace of rate cuts may slow, the trend direction continues to progress towards rate cuts. As long as the U.S. economy experiences any unexpected deterioration, the Fed will undoubtedly accelerate interest rate cuts, and there is no need to worry about any possibility of rate hikes. In this scenario, betting on the direction of rate cuts is a relatively safe approach.
In fact, the market has overreacted to the Fed's statement on delaying interest rate cuts. This statement only suggests a reduction in the expected rate cut in 2025 from 1% to 0.5%. The benchmark interest rate of only 0.5% does not represent a significant difference for the current market flooded with funds. This drop seems more like a reason for major players to take profits, and it does not affect the overall structure of the bull market. Considering the possibility of an economic recession in the U.S., accelerating interest rate cuts still have a high likelihood.
This drop helps to cool down the previous overly optimistic bullish sentiment. Bitcoin has been too crazy in the past, rising from $60,000 to $100,000 in just two months. The pullback to $95,000 after the Fed's hawkish statement is a healthier situation, although it forced many highly leveraged investors to be liquidated, it does not affect the positions of long-term investors. Moreover, the pullback was not large, with a weekly drop of only 5%, and the market situation remains healthy.
Under the premise that the macroeconomic environment remains unchanged, DeFi tokens are the hardest-hit segment this time, with weekly drops mostly reaching between 10% and 20%. Considering Trump is about to relax regulation on crypto tokens, there may be a series of favorable DeFi policies released next year. Additionally, it has been reported that Trump has been meeting with industry leaders from crypto exchanges to discuss the formulation of future U.S. cryptocurrency-related policies. It is expected that in the future, more DeFi-related innovations will be opened up to crypto exchanges.
Additionally, it is expected that the U.S. will allow traditional banks to open their financial services to blockchain or cryptocurrency-related companies. In the future, more cryptocurrency-related companies will obtain banking services such as account custody, transfers, or withdrawals. A more robust regulatory environment and services are anticipated under these unchanged premises. We believe that DeFi tokens still have their upward potential; the last wave of favorable policies from Trump has not yet ended, and it is only temporarily affected by the Fed's slowing interest rate cuts. There will be opportunities to reignite the upward momentum.
Currently, most altcoins in the market do not have independent movements; they are basically following Bitcoin's actions. These coins should wait until Bitcoin confirms a new high before funds come in to drive the price up. Otherwise, any rally will be meaningless, as a casual pullback from Bitcoin will bring the prices back down.
So now we can only wait for the market to confirm before we enter. We might miss a bit of profit in the early stages, but having already escaped at a phase high point is a profit in itself. As long as we don't see a single line shooting up thirty points, we still have an advantage in entering.