Why do interest rate cut expectations have such a big impact?

To understand the impact of interest rate cuts, one must first grasp the core role of the Federal Reserve's interest rates – they are the anchor for the global cost of funds. When interest rates rise, capital flows back to dollar assets, putting pressure on risk asset prices; when expectations for interest rate cuts rise and liquidity expectations improve, funds will naturally seek markets with higher returns, such as the stock market, tech stocks, and even the crypto market. In the past few years, we have witnessed this chain reaction multiple times:
After the pandemic in 2020, the Federal Reserve quickly lowered interest rates → U.S. stocks and Bitcoin both rose;
The interest rate hike cycle in 2022 has begun → The dollar strengthens, and risk assets collectively pull back; now, the market is once again on the eve of liquidity recovery. This is also one of the key reasons for the recent stabilization and even rebound in the prices of Bitcoin, Ethereum, and some mainstream cryptocurrencies.
The relationship between interest rate expectations and the cryptocurrency market
The cryptocurrency market is extremely sensitive to macro liquidity. In a world without "central bank support," market sentiment and dollar liquidity almost determine the short-term direction.
In simple terms, the expectation of interest rate cuts = cheaper funds = increased willingness to invest in risk assets. Especially for institutional investors, their allocation logic is very simple:
When bond returns decline and cash yields decrease, there is a natural tendency to seek new areas of high volatility and high returns, which is precisely the characteristic of crypto assets. Additionally, with the Bitcoin halving approaching and Ethereum staking yields stabilizing, expectations of interest rate cuts combined with improvements in the fundamentals of the crypto industry will create a relatively unique "resonance window." This is why, even in the absence of direct policy benefits, the prices of crypto assets have remained relatively strong recently!
However, do not forget a risk: expectations ≠ reality. However, there is always a time lag between market expectations and policy decisions.
The expectation of a Federal Reserve rate cut is rising, but that does not mean it will take action immediately. Historically, the Federal Reserve usually needs to confirm three signals before it truly begins to ease.
Inflation has clearly fallen below the target range; signs of weakness in the labor market are evident; risks within the financial system are starting to surface. Currently, the United States is still in a phase of "economic slowdown but not recession," which means that the pace of rate cuts will not be too fast or aggressive.
In other words, the market can hype in advance, but the policy shift still requires time to be validated.
Summary: The signals of liquidity warming are worth paying attention to, but should not be blindly followed. From a broader perspective, the rising expectations of interest rate cuts by the Federal Reserve indicate that the global liquidity cycle may be shifting from tightening to easing. This is indeed a positive signal for all risk assets, especially the cryptocurrency market. However, it is also necessary to remain rational: a shift in macro policies is often accompanied by economic pressures, suggesting that growth momentum has begun to weaken; overly heated expectations of interest rate cuts may lead to short-term volatility, particularly when data fluctuates. For investors, this moment feels more like a "pre-dawn preparation period"—the market is bottoming out, policies are shifting, and sentiments are recovering. The real trend still needs to confirm the signal and substantial changes in capital flows. In short: the Federal Reserve's expectations for interest rate cuts are like a warm breeze that disperses the chill in the market, but winter is not over yet. The real spring will wait for the moment when both data and policies turn simultaneously.