Crypto Market Is Down 14% Since the Fed Cut Rates: The Role of Rising U.S. Treasury Yields

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As a seasoned crypto investor with battle scars from multiple market corrections, I can’t help but feel a sense of déjà vu as I watch the recent sell-off unfold. The Federal Reserve’s policy announcement has once again reminded us that in the world of cryptocurrencies, no one rides for free – not even the wildest of bulls.

Following the Federal Reserve’s policy declaration on December 18, 2024, the cryptocurrency market has suffered substantial losses. The combined value of all cryptocurrencies dropped from approximately $3.66 trillion on December 17 to around $3.16 trillion by December 23.

Over the past week, a staggering $500 billion, or approximately 13.6%, has been erased from various portfolios. This significant loss can be attributed to the escalating U.S. Treasury yields, which are gradually tightening financial conditions and exerting pressure on speculative assets such as cryptocurrencies. Let’s delve deeper into how and why this situation is unfolding.

During its meeting on December 17-18, the Federal Reserve lowered its key interest rate by a quarter percent, setting the new range at 4.25% – 4.50%. This move might be seen as dovish, but the accompanying statements and economic forecasts revealed a cautious stance. The Fed emphasized that inflation continues to stay high, particularly in areas like services, and reaffirmed its long-term aim of reducing inflation to 2%. The forecasts released at 2:00 p.m. ET on December 18 showed that policymakers anticipate the federal funds rate to be around 3.9% by the end of 2025, suggesting they believe a tight monetary policy will need to persist for longer than initially expected.

In simpler terms, the information published alongside the statement provides a more detailed view of the Federal Reserve’s position. The “dot plot” indicates that most decision-makers predict just two further rate reductions in 2025, bringing the federal funds rate down to 3.9%. This is a significant change from the earlier prediction made in September 2024, where four cuts were expected. This suggests that the Fed may believe that a tighter monetary policy will be necessary for a longer period than initially anticipated. Furthermore, the long-term neutral rate was slightly increased to 3%, reflecting a slight adjustment in decision-makers’ expectations of inflation and economic conditions.

In simple terms, the Federal Reserve (Fed) is maintaining a cautious stance due to ongoing high inflation rates evident in current data. On December 20th, the Bureau of Economic Analysis published the “Personal Income and Outlays” report for November 2024, showing that the annual core PCE inflation rate stayed at 2.8%, contrary to predictions of a decrease. This was the fifth straight month where core PCE inflation surpassed 2.5%. The Fed’s choice to reduce the speed of interest rate cuts is an indication of their commitment to prevent easing monetary policy prematurely, which could potentially undo recent advancements in controlling inflation.

In response to the Federal Reserve’s communication, the bond market showed a noticeable spike. The interest rate on the 10-year U.S. Treasury bond increased from 4.40% on December 17 to 4.56% by December 23. This surge in interest rates suggests that the market is adjusting its predictions regarding monetary policy, inflation, and economic expansion. An increase in yields can set off a chain reaction throughout financial markets, carrying substantial consequences for cryptocurrencies.

As an analyst, I find that increased Treasury yields tend to tighten financial conditions. In contrast, cryptocurrencies flourish in a context of ample liquidity. However, a rise in yields suggests diminishing liquidity as investors opt for safer and more profitable fixed-income assets. This transition diverts funds from speculative markets such as crypto, exacerbating selling pressure.

As interest rates climb higher, the allure of investing in cryptocurrencies diminishes due to their lack of assured returns. On the other hand, a 10-year Treasury bond currently yields 4.56%, providing a risk-free return that is more enticing compared to the unpredictable nature of digital currencies.

As a crypto investor, I’ve noticed that when yields start climbing higher, it usually means investors are becoming more cautious. With borrowing costs escalating and financial circumstances becoming stricter, riskier assets like cryptocurrencies tend to experience outflows as investors opt for safer investments instead.

It’s clear that the surge in yields is having an impact throughout the crypto world. In just a few days, the total market value dropped by half a trillion dollars, mirroring significant declines across leading cryptocurrencies. Unlike stocks, which are tied to earnings and valuations, cryptos depend on liquidity and speculative trends, making them susceptible to large-scale economic changes.

2021’s cryptocurrency price drops underscore their sensitivity to broader economic conditions. Increasing Treasury bond yields, persistent inflation, and the Federal Reserve’s careful approach have made it difficult for risky investments like cryptocurrencies. As we move towards 2025, these factors are expected to significantly influence the direction of the crypto market.

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2024-12-23 19:41