I recently noticed an interesting phenomenon in the cryptocurrency market. Bitcoin has been falling from its all-time high in October last year for almost a year now, and this recent drop has been particularly fierce, currently hovering around $76k, which is quite a bit below the $80k at the end of last year. Ethereum's situation is similar, with nearly a 3% decline over the past week, and the entire crypto sector is under pressure.

The behind-the-scenes cause of this decline is the appreciation of the US dollar. When Trump nominated former Federal Reserve official Kevin Warsh as Fed Chair, the market immediately reacted—this guy is known for his hawkish stance, advocating for reducing the Fed's balance sheet and tightening liquidity. Once the news broke, the dollar index fund rose by 1% on the same day. For cryptocurrencies, this is not a good signal.

Speaking of liquidity, this has been the core driver of the crypto market over the past few years. During the Fed's easing policies, capital was abundant, and risk assets were in favor. But now, expectations have reversed—January saw the Fed holding steady, and JPMorgan predicts only one rate cut this year. This tightening outlook is a big blow to cryptocurrencies, as these assets are most vulnerable to liquidity drying up.

From an investment perspective, if we truly enter a hawkish cycle, short-term opportunities for crypto ETFs may be limited. Conversely, inverse ETFs are worth paying attention to, such as ProShares' Bitcoin and Ethereum short ETFs, which can be used to hedge against downside risks. However, these are tactical moves; in the long run, it still depends on the Fed's true intentions.

Interestingly, AI stocks have also been under pressure recently, but Palantir's earnings report was solid, and Oracle announced a $25 billion bond issuance for AI infrastructure. This could boost market confidence and potentially lead to a crypto rebound. But I believe the big move is still ahead, unless central bank policies send clearer signals.

Another underestimated risk factor is chip shortages. Cryptocurrency mining relies heavily on chips, and if GPU and ASIC chip supplies are tight, mining costs will rise, causing small miners to exit, which could reduce network activity. Although the GENIUS Act passed last year provides a clearer regulatory framework for crypto, which is positive, the difficulties in mining might offset some of this benefit.

Overall, cryptocurrencies are currently in a wait-and-see phase. With unclear policies and shrinking liquidity, short-term rebounds are limited. Investors interested in this sector should stay patient and wait for clearer signals from central banks before making decisions.