Crypto markets are in turmoil, with major declines in major assets like Bitcoin and Ethereum since December 18, 2024. The downturn began immediately after the Federal Reserve’s FOMC meeting, during which policymakers issued a cautious statement on monetary policy and Fed Chairman Jerome Powell. , made remarks that scared the markets. Jamie Coutts, head of crypto at Real Vision, explains how tight liquidity and macroeconomic factors are driving the sell-off.
The Federal Reserve’s decision to lower the federal funds rate by 0.25 percentage points on December 18 initially appeared to be a conciliatory move. However, the accompanying statements paint a different picture. Powell stressed that while inflation has eased significantly, it remains above the Fed’s 2% target. He explained that the Fed’s policy rate – currently at 4.25%-4.5% – remained “significantly restrictive” and that future rate cuts would slow unless there was “further progress in matter of inflation.
Powell’s comments about the strength of the economy, combined with projections of just two more cuts in 2025, indicate that the Fed intends to maintain tighter liquidity conditions for longer than markets expected. This tone contrasted sharply with expectations of a more aggressive easing cycle, catching investors off guard and leading to immediate selling pressure on risky assets, including cryptocurrencies.
Jamie Coutts, in his December 20 analysis of X, links the crypto market crash to the tightening global liquidity environment, a theme he has been discussing since early December. According to Coutts, liquidity has been contracting for two months, due to shrinking central bank balance sheets and increasing volatility in the bond market. These conditions are unfavorable for risky assets, which rely heavily on abundant liquidity to support demand.
Coutts points out that cryptocurrencies, particularly Bitcoin, are particularly sensitive to changes in liquidity. Historically, Bitcoin has struggled during periods of tightening financial conditions. The Fed’s cautious message amplified existing concerns, leading to accelerated outflows from crypto markets. As Coutts points out, this is a late reaction to the trend toward tighter liquidity.
The response from the crypto market has been rapid. Less than 30 minutes after Powell’s press conference, Bitcoin began to decline and the selling continued over the next few days. On December 20, Bitcoin was down 7.2% in the past 24 hours, and Ethereum was down 10.7%. Weekly losses for the two assets exceeded 5% and 16%, respectively. Altcoins like Solana and Dogecoin saw even steeper declines, with weekly losses of over 16% and 26%.
Coutts’ analysis attributes this sharp slowdown to the ongoing tightening of global liquidity conditions, including shrinking central bank balance sheets and reduced financial liquidity. While Coutts did not directly reference Powell’s remarks, he pointed out that these liquidity issues have been building up over the past couple of months, creating an unfavorable environment for risky assets like crypto.
Powell’s remarks at the press conference highlighted the balance the Fed must strike. He recognized the risks of reducing policy stringency too quickly, which could harm inflation growth, rather than moving too slowly, which could unnecessarily weaken economic activity. This balancing act has created uncertainty in the markets, contributing to increased volatility.
Coutts also cites global liquidity indicators, including the US Dollar Index (DXY) and global money supply (M2), as indicators of why crypto markets are struggling. A stronger dollar and reduced money supply tighten financial conditions, leaving little room for speculative assets like crypto to thrive. While global M2 may be stabilizing, Coutts warns that Bitcoin’s historical lag behind liquidity trends means further challenges could arise.
In summary, Jamie Coutts believes that the crypto crash is due to diminishing global liquidity, caused by shrinking central bank balance sheets and money supply (M2), making it harder for Bitcoin to grow and other risky assets.
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