The Fed’s Seven Weapons: Rate Hikes, Rate Cuts, Balance Sheet Expansion, Balance Sheet Reduction, Reverse Repurchase Agreements, Treasury Yields—What Impact Do They Really Have on Crypto?

Guys, today we’re not talking about candlesticks. Let’s talk about some macro stuff.

A lot of people often hear the news mention “Fed rate hikes,” “balance sheet reduction,” and “reverse repurchase agreements.” They recognize every word individually, but have no idea what they mean together. Today I’ll break these terms down one by one in the simplest possible language. By the end, you’ll know exactly what these things have to do with your positions.

I. Rate Hikes and Rate Cuts
Let’s start with rate hikes.

What does a rate hike mean? A rate hike means the Fed raises the “price of borrowing money.”

Imagine the Fed as the “wholesale supplier of money.” When banks run out of money, they borrow from the Fed. The Fed says: “You used to borrow $100 and pay back $101. Now you have to pay back $103.” That’s a rate hike.

What happens after a rate hike? Borrowing becomes more expensive, so companies are less willing to take out loans for expansion, and ordinary people are less willing to borrow money to buy homes and cars. The amount of money in the market decreases. When there’s less money, inflation gets pushed down. But when there’s less money, there’s also less available to buy risk assets, so stocks fall and Bitcoin falls too. For the US dollar, rate hikes make the dollar more valuable because holding dollars earns higher interest, causing global capital to flow toward the United States.

Rate hikes are bearish for crypto because liquidity tightens, and money exits high-risk assets to buy US Treasuries and earn interest.

The opposite is a rate cut.

A rate cut means lowering the price of borrowing money. Borrowing becomes cheaper, companies become more willing to borrow for expansion, and ordinary people become more willing to borrow and spend. The amount of money in the market increases. When there’s more money, risk assets rise. Rate cuts are bullish for crypto. The massive liquidity injection in 2020, for example, sent Bitcoin from $3,800 to $69,000, driven by rate cuts combined with balance sheet expansion.

In one sentence: rate hikes = turn off the faucet, crypto falls; rate cuts = turn on the faucet, crypto rises.

II. Balance Sheet Expansion and Reduction
Many people have trouble understanding these two terms, but they’re actually easier to understand than rate hikes and rate cuts.

Let’s start with balance sheet expansion. The “balance sheet” refers to the Fed’s balance sheet. Balance sheet expansion means the Fed’s assets increase. How do they increase? The Fed prints money directly to buy Treasuries and mortgage-backed securities. The newly printed money flows into the market, increasing the amount of money in circulation.

This action also has a more familiar name: “quantitative easing,” or QE. When the COVID-19 pandemic broke out in 2020, the Fed expanded its balance sheet without limit. It was extremely aggressive, sending Bitcoin directly from $3,800 to $69,000. Balance sheet expansion means directly injecting money into the market. Regardless of interest rates, the priority is to increase the amount of money first.

Balance sheet reduction is the exact opposite. The Fed shrinks its balance sheet by selling the Treasuries it previously bought, or by allowing them to mature without purchasing new ones. Money is directly drained from the market. This is called “quantitative tightening,” or QT. When the Fed began reducing its balance sheet in 2022, Bitcoin fell from $69,000 all the way to $15,000.

What’s the difference between balance sheet expansion and reduction? You can think of it this way: rate hikes and cuts raise or lower the cost of borrowing, encouraging people to borrow less or more. Balance sheet reduction and expansion directly drain or inject money into the market. Rate hikes and cuts regulate market behavior by changing borrowing costs, while balance sheet reduction and expansion directly change the total amount of money in the market.

Balance sheet expansion = open the floodgates, crypto rises; balance sheet reduction = close the floodgates, crypto falls.

III. Reverse Repurchase Agreements
To be clear, we’re only talking about the Fed’s reverse repurchase operations here.

The essence of a reverse repurchase agreement is this: financial institutions have cash on hand but don’t want to leave it sitting idle, so they lend it to the Fed in exchange for a “Treasury collateral certificate,” then take it back the next day while earning some interest. Put simply, financial institutions deposit money with the Fed and earn a bit of interest on it.

What is the relationship between reverse repurchase agreements and rate hikes? Rate hikes increase the interest rate on reverse repurchase agreements. The higher the reverse repurchase rate, the more willing financial institutions are to keep their money with the Fed instead of using it to buy stocks, buy crypto, or issue loans. An increase in the size of reverse repurchase operations means the amount of money in the market is “shrinking.” Money is flowing from the market back to the Fed, and liquidity is being drained.

So, reverse repurchase operations are essentially a supporting tool for rate hikes, helping withdraw excess funds from the market.

IV. What Exactly Is the Relationship Between Rate Hikes and Cuts and Balance Sheet Expansion and Reduction?
When you look at all four together, the Fed’s intentions become clear:

Rate cuts + balance sheet expansion = full easing, more money, crypto rises

Rate hikes + balance sheet reduction = full tightening, less money, crypto falls

Rate cuts + balance sheet reduction = lowering interest rates while withdrawing money, a contradictory combination that can cause market confusion

Rate hikes + balance sheet expansion = raising interest rates while injecting money, also a contradictory combination

Historically, 2020 was “rate cuts + balance sheet expansion,” which led to a major crypto bull market. 2022 was “rate hikes + balance sheet reduction,” which led to a major crypto bear market. The Fed is currently following a “rate cuts + balance sheet reduction” path—nominally cutting rates while still reducing its balance sheet every month and draining money from the market. That’s why BTC has not broken to a new high yet: balance sheet reduction is still continuing, and liquidity has not fully recovered.

V. Treasury Yields
Treasury yields appear in the news every day, but many people don’t know what they actually mean.

Treasuries are “IOUs” issued by the US government. You lend money to the US government, and the government gives you an IOU that repays the principal plus interest at maturity. The Treasury yield is the return on holding that “IOU.”

Treasuries can be freely traded in the market. When everyone rushes to buy Treasuries, their prices are pushed higher, but their yields fall. When everyone sells Treasuries, their prices fall and their yields rise.

There is a counterintuitive relationship here: Treasury prices rise, yields fall; Treasury prices fall, yields rise.

Why is the 10-year Treasury yield particularly important? Because it is the “anchor” for global asset pricing. The pricing of all risk assets must take the risk-free rate into account. The higher the risk-free rate, the less attractive risk assets become.

For crypto, when the 10-year Treasury yield exceeds 4.5%, risk assets come under pressure. When yields are too high, money flows out of crypto and the stock market to buy high-yielding Treasuries. Conversely, when yields fall, money flows back into risk assets.

VI. A Special Case: An Inverted Yield Curve
Simply put, an inverted yield curve means long-term Treasury yields are lower than short-term Treasury yields.

Under normal circumstances, the longer the borrowing period, the greater the risk, so the return should be higher. Therefore, the 10-year yield should be higher than the 2-year yield. But sometimes an inversion occurs, with long-term yields falling below short-term yields.

Why does an inversion happen? Because the market expects the economy to run into trouble soon. Everyone rushes to buy long-term Treasuries for safety, pushing up long-term Treasury prices and lowering their yields. Meanwhile, short-term Treasury yields continue to rise because the Fed is still hiking rates.

Historically, the US economy has entered a recession after every inversion. An inversion also occurred in 2023, and the market remained concerned about an economic recession. Once the inversion unwinds, the market begins to expect rate cuts, and crypto can finally enter a genuine bull market.

VII. What Do These Things Have to Do With Your Positions?
Guys, these things may sound far removed from us, but in reality, they determine whether your positions rise or fall.

When the Fed injects liquidity, the dollar depreciates, capital flows into risk assets, and crypto rises. When the Fed withdraws liquidity, the dollar appreciates, capital flees risk assets, and crypto falls.

Remember this core logic: the major bull market of 2020–2021 was fueled by “rate cuts + balance sheet expansion”; the major bear market of 2022 was caused by “rate hikes + balance sheet reduction.” The Fed is now in a rate-cutting cycle, but balance sheet reduction is still continuing, so BTC remains stuck below $70k. It’s not because the fundamentals are weak, but because liquidity has not fully opened up yet.

Only when the Fed announces an end to balance sheet reduction, or clearly shifts toward full easing, will the final shackles on a genuine bull market be completely removed.

Macro determines the direction, and technical analysis finds the entry points. Guys, this sentence is worth its weight in gold. You don’t need to predict whether the Fed will hike rates next month, but you must understand whether we are currently in a liquidity-injection cycle or a liquidity-withdrawal cycle. Hold during liquidity-injection cycles; pullbacks are buying opportunities. Be cautious during liquidity-withdrawal cycles; rebounds are selling opportunities.