When interest rate cuts are no longer the cure: dissecting the triple pressures behind the year-end turbulence in the crypto market

Recent market fluctuations are not isolated events. They are the result of three macro factors stacking over time, triggering a structural adjustment.

Part One: About the Fed’s rate cut. On December 11, the Federal Reserve announced a 25 basis point cut, in line with market expectations. However, market reactions quickly cooled, with US stocks and cryptocurrencies declining in tandem. This reveals a key fact: a rate cut itself does not equal liquidity easing.

The changes in the dot plot shook market expectations. The latest forecasts show only one rate cut possible by 2026, below the previous market expectation of 2 to 3 cuts. Among the 12 voting members, 3 opposed the cut, with 2 advocating for holding rates steady. This divergence indicates that the Fed’s internal caution on inflation is higher than market understanding.

This rate cut is more of a technical adjustment rather than the start of an easing cycle. Markets are expecting a clear, sustainable easing path. When investors realize future policy space may be locked, optimistic expectations are revised downward. The rate cut becomes a sign that “bullish momentum is exhausted,” and previously built long positions begin to unwind.

$BTC and other mainstream cryptocurrencies’ pullback is a passive reaction to the reality that “liquidity will not return quickly.” Futures basis converges, ETF marginal buying weakens, and prices move toward more conservative equilibrium levels.

Deeper changes involve the migration of the US economic risk structure. Some studies suggest that by 2026, the core risk in the US economy may be directly triggered by asset price corrections leading to demand contraction. The roughly 2.5 million “excess retirees” post-pandemic have consumption highly linked to asset prices.

The Fed faces a dilemma: aggressive inflation suppression could trigger asset price crashes, while tolerating higher inflation helps maintain financial stability. One judgment is that the Fed is more likely to choose “protect the market” rather than “protect inflation” in the future. This environment is not friendly to risk assets.

Part Two: About the Bank of Japan’s rate hike. If the Fed’s actions disappointed the market’s expectations for future liquidity, then the BOJ’s move on December 19 was a “disarmament operation” affecting the global financial foundation. The market expects a 25 basis point hike to 0.75%, the highest in three decades.

The key is not the absolute interest rate but its chain reaction on global capital logic. Japan has long been the world’s most important low-cost financing source. Institutions borrow yen at near-zero costs, exchange for USD, and allocate risk assets like US stocks, $BTC, $ETH. This has become a long-term structure worth trillions of dollars.

Once the BOJ enters a rate hike cycle, this assumption will be reevaluated. Hikes will change expectations of long-term yen depreciation, and arbitrage trades will add exchange rate risk considerations. Capital faces a simple choice: close positions early to reduce exposure.

The way to close positions is to sell risk assets and convert back to yen to repay financing. This process exhibits “indiscriminate selling,” with $BTC, $ETH, and US stocks often under pressure simultaneously.

In August 2025, the BOJ unexpectedly raised rates to 0.25%, causing $BTC to drop 18% in a single day. Although the market had some expectations, risks may not be fully digested, especially when combined with other uncertainties.

Major central banks’ policies are diverging: the Fed nominally cuts rates but tightens expectations, while Japan tightens. This divergence will increase capital flow volatility, potentially turning position unwinding into a phased process. For crypto markets, this means price volatility may remain elevated for a period.

Part Three: About the Christmas holiday. Starting December 23, major North American institutions enter holiday mode, and the market enters a typical liquidity contraction phase of the year. Holidays do not change fundamentals but significantly weaken the market’s “absorption capacity” for shocks.

For crypto markets that rely heavily on continuous trading and market-making depth, this liquidity decline is often more destructive. Under normal conditions, market makers and institutions provide two-way liquidity, dispersing selling pressure. During holidays, these liquidity providers reduce activity, shallow market depth.

More concerning is that holidays coincide with the release of macro uncertainties discussed earlier. The Fed’s “hawkish rate cut” and the BOJ’s rate hike could be absorbed over a longer period, but when they occur during the thinnest liquidity windows, their impact is amplified.

Insufficient liquidity compresses price discovery, forcing the market to adjust through more violent price jumps. Price declines may trigger passive liquidation of leveraged positions, with selling pressure rapidly amplified in shallow order books, causing sharp volatility in a short time.

Historical data shows that from late December to early January, crypto market volatility remains significantly higher than the annual average. Holidays do not determine direction but greatly amplify the price response once the trend is confirmed.

Overall, the current crypto market correction is a phased re-pricing triggered by changes in global liquidity paths. The Fed’s rate cut did not provide new valuation support, and markets are adjusting to a new environment of “rate cuts but insufficient liquidity.”

The BOJ’s rate hike is the most structurally significant variable, shaking the core financing assumptions of global arbitrage trading and causing systemic contraction of risk asset exposure. Such adjustments tend to be phased and recurrent.

For investors, the key challenge in this phase is to identify environment changes. When policy uncertainty and liquidity contraction combine, risk management becomes more important than trend prediction. Valuable market signals often emerge after macro variables gradually materialize and arbitrage funds complete phased adjustments.

Currently, it resembles a transitional period of recalibrating risk and rebuilding expectations. The medium-term direction of prices will depend on the actual recovery of global liquidity after the holidays and whether the divergence among major central banks further deepens.

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