Fed Chair Powell added to market concerns by stating that current regulations prevent the Fed from owning digital currency, and it is not pursuing any changes to the law.
The crypto market’s value dropped 7.5% on Thursday after the Fed Reserve cut the fed funds rate by 25 basis points. The new target range of 4.25%-4.50% met expectations, following which investors moved away from risk-on assets like cryptocurrencies and US equities.
Officials signaled they would likely stop cutting rates next year, pointing to a stable labor market and ongoing inflation. However, the Fed’s decision was not unanimous. Cleveland Fed President Beth Hammack voted to keep rates unchanged. This split underscored concerns about inflation, which remains above the 2% target and is now projected to persist until 2027.
Fed Chair Jerome Powell’s comments further affected the market. At a Wednesday news conference, he stated the central bank cannot hold Bitcoin and is not seeking any legislative changes.
Regarding the legal complexities of holding bitcoin, Powell clarified “that’s the kind of thing for Congress to consider, but we are not looking for a law change at the Fed.”
Uncertainty Over US Bitcoin Reserve Fuels Market Decline
His comments led to a drop in Bitcoin’s value, which had previously surged after Donald Trump’s Nov. 5 election win. The rise stemmed from hopes for a more hands-off government approach to assets primarily used for speculation rather than as real currency.
Trump has announced plans to create a US Bitcoin strategic reserve. However, he has not provided details about its structure. He mentioned it might begin with Bitcoin seized from criminals, totaling about 200,000 tokens worth roughly $21b at current prices.
Republican Senator Cynthia Lummis has proposed creating this reserve through legislation. Under this proposal, the US Treasury would buy 200,000 bitcoins annually until it collects one million tokens. Funding would come from Federal Reserve bank deposits and gold reserves.
Bitcoin last fell 3.2% to $101,127, a day after crossing $108,000 for the first time this year. Ether fell 4.5% to $3,665, while XRP slid 6.8% to $2.35.
How Fed Policies Shape Crypto Markets Through Liquidity and Sentiment
Ruslan Lienkha, chief of markets at Swiss-based fintech platform YouHodler, said that cryptocurrencies remain too unpredictable to act as an effective safeguard against conventional currencies in developed economies.
“However, they are increasingly viewed as a long-term hedge against inflation. In this context, faster rate cuts by the Fed would inject more liquidity into the financial system, potentially boosting cryptocurrency prices and global interest in the market including Europe,” he said.
Lienkha further explained that Fed policies indirectly impact the crypto market. This happens as cryptocurrencies become increasingly linked to traditional financial systems and instruments.
“While the administration can directly influence the crypto market through policy decisions and regulatory actions, the Fed’s role is limited to managing monetary policy, which indirectly affects crypto via its impact on liquidity and investor sentiment in the financial ecosystem.”