Analysis of the crypto market situation and the FOMC meeting on January 30

Blog post description.

1/31/20253 min read

1. Background before FOMC

From September 2024, the US Federal Reserve (Fed) will switch to quantitative easing (QE) and cut interest rates by 100 bps (1%). Bitcoin has risen from $60K to $109K, but is currently under pressure as the Fed reduces its expectation of rate cuts from 5 times to 2-3 times in 2025.

Inflation remains the key factor. Core CPI fell to 3.2% but is still 120 bps away from the 2% target. Core PCE and ISM services price index are still rising, raising concerns that the Fed will keep its policy more hawkish.

2. How does FOMC affect Crypto?

High interest rates encourage capital to flow into bonds and safe assets, instead of risky investments like Bitcoin or altcoins. If the Fed cuts interest rates sharply, cheap money will return to the crypto market.

  • High interest rates → Money leaving crypto (negative).

  • Low interest rates → Money flows into crypto (positive).

History shows a clear correlation between monetary policy and Bitcoin price:

  • March 2023: Fed pauses rate hikes → Bitcoin rises from $25K to $31K.

  • September 2024: Fed starts easing policy (QE), cutting interest rates by 100 bps → Bitcoin surges from $60K to $109K.

  • December 2024: Fed reduces rate cut forecast from 5 to 2 → Bitcoin drops more than 10% after meeting.

  • Altcoins tend to react more strongly than Bitcoin:

    • As interest rates fall, speculative money flows increase, causing altcoins to explode.

    • When the Fed maintains high interest rates, altcoins often weaken more than Bitcoin as investors reduce risk.

If the Fed continues to maintain its hawkish policy, Bitcoin may hold its price better but altcoins will come under greater pressure.

3. Inflation cools, but not enough for the Fed to pivot

Core CPI fell to 3.2%, but not enough for the Fed to act quickly. Markets are worried about interest rate uncertainty, with the 10-year bond yield rising to 4.79%, its highest since October 2023.

The US economy is still strong:

  • GDP Q2 & Q3/2024 will reach 3% and 3.1% respectively.

  • 256K more jobs created in December.

  • The unemployment rate fell from 4.2% to 4.1%.

The Fed is under no urgent pressure to cut interest rates.

4. Trump - Powell confrontation

Trump wants to cut interest rates now to support the economy and increase his chances of re-election. Powell asserts that the Fed is completely independent and "has no contact with Trump."

The probability of the Fed keeping interest rates high in the short term is very high (98%). If the Fed maintains a hawkish stance, the market could fall immediately.

5. How will Bitcoin & Altcoins react?

  • Bitcoin

    • Being considered as digital gold, it holds its value well despite high interest rates.

    • Bitcoin ETFs continue to attract inflows.

  • Altcoins

    • More sensitive than Bitcoin, subject to strong selling pressure.

    • Without large QE, it is difficult to create an "altcoin season".

Scenario forecast for altcoins if Fed keeps high interest rates for long:

  • Negative scenario: If high interest rates persist and cash flows continue to be drawn to safe assets, altcoins could decline more than Bitcoin due to risk aversion.

  • Neutral scenario: Some altcoins may hold their value well if they have strong real-world applications or receive investment from large funds.

  • Positive scenario: If the market accepts high interest rates as the new normal, some altcoins could recover thanks to technological innovations or the explosion of areas like DeFi and AI in blockchain.

  • Bitcoin

    • Being considered as digital gold, it holds its value well despite high interest rates.

    • Bitcoin ETFs continue to attract inflows.

  • Altcoins

    • More sensitive than Bitcoin, subject to strong selling pressure.

    • Without large QE, it is difficult to create an "altcoin season".

In the long run, the US cannot maintain high interest rates because of its huge public debt. When the debt crisis occurred, the Fed was forced to return to QE, promoting strong crypto growth.