The recent pullback in the crypto market is more akin to a phased repricing triggered by changes in global liquidity pathways, rather than a simple reversal of a trend.

The recent volatility in the crypto market is not an isolated event, but rather a structural adjustment caused by the overlapping of three macro factors over time. First, the Federal Reserve's interest rate cuts during the Super Central Bank Week did not initiate a clear easing cycle; instead, it signaled a restrained approach to future liquidity through the dot plot and voting structure, correcting market expectations of 'continuous easing.' Second, the upcoming interest rate hikes by the Bank of Japan are shaking the yen carry trade structure, which has long served as a basis for low-cost global financing, potentially triggering a phase of deleveraging and synchronized pressure on risk assets. Lastly, the liquidity contraction brought about by the Christmas holidays has significantly reduced the market's ability to absorb the aforementioned macro shocks, amplifying price volatility. With these three factors combined, the crypto market has entered a stage of high volatility and low tolerance, where price behavior exhibits more nonlinear characteristics and needs to be understood from a structural perspective.

One, Federal Reserve Rate Cut: The Easing Path After the Rate Adjustment

On December 11, the Federal Reserve announced a 25 basis point rate cut as expected. On the surface, this decision was highly consistent with market expectations and was even interpreted as a signal that monetary policy was beginning to turn towards easing. However, the market reaction quickly turned cold, with U.S. stocks and crypto assets falling in tandem and risk appetite significantly contracting. This seemingly counterintuitive trend actually reveals a key fact in the current macro environment: a rate cut does not equal liquidity easing. In this round of Super Central Bank Week, the message conveyed by the Federal Reserve is not 'to reintroduce liquidity' but a clear constraint on future policy space. From the details of the policy, changes in the dot plot have caused substantial shocks to market expectations. The latest forecasts indicate that the Federal Reserve may only cut rates once in 2026, significantly lower than the 2 to 3 cuts previously priced in by the market. More importantly, in the voting structure of this meeting, out of 12 voting members, 3 explicitly opposed the rate cut, with 2 advocating for keeping rates unchanged. This disagreement is not peripheral noise but clearly indicates that the Federal Reserve's internal vigilance towards inflation risks is much higher than the market's previous understanding. In other words, this rate cut is not the starting point of an easing cycle but rather a technical adjustment to prevent financial conditions from tightening too much in a high-interest rate environment.

It is precisely for this reason that the market is not truly expecting a 'one-time rate cut,' but rather a clear, sustainable, and forward-looking easing path. The pricing logic for risk assets relies not on the absolute level of current interest rates but on the discounting of future liquidity environments. When investors realize that this rate cut has not opened up new easing space and may instead lock in future policy flexibility, the original optimistic expectations are quickly corrected. The signals released by the Federal Reserve are akin to a 'painkiller,' providing temporary relief from tension but not changing the underlying issue; meanwhile, the restrained stance revealed in the policy outlook forces the market to reassess future risk premiums. In this context, the rate cut instead becomes a typical case of 'good news being priced in.' The long positions built around easing expectations begin to unwind, with overvalued assets being the first to feel the pressure. Growth sectors and high beta sectors in U.S. stocks are the first to come under pressure, and the crypto market is no exception. The pullback of Bitcoin and other mainstream crypto assets is not due to a single negative factor, but a passive reaction to the reality that 'liquidity will not return quickly.' When the futures basis converges, marginal ETF buying weakens, and overall risk appetite declines, prices naturally gravitate towards a more conservative equilibrium level. A deeper change is reflected in the shift of risk structures within the U.S. economy. An increasing number of studies indicate that the core risks facing the U.S. economy in 2026 may no longer be traditional cyclical recessions but demand-side contractions directly triggered by significant asset price corrections. After the pandemic, a group of about 2.5 million people in the U.S. has 'excessively retired,' and this group’s wealth is highly dependent on the performance of the stock market and risk assets, creating a highly correlated relationship between their consumption behavior and asset prices. Once the stock market or other risk assets experience sustained declines, this group’s consumption capacity will contract in tandem, creating negative feedback on the overall economy. In this economic structure, the Federal Reserve's policy choices are further constrained. On one hand, stubborn inflationary pressures still exist, and premature or excessive easing may reignite price increases; on the other hand, if financial conditions continue to tighten and asset prices undergo systematic corrections, this could quickly transmit to the real economy through wealth effects, triggering demand declines. The Federal Reserve thus finds itself in an extremely complicated dilemma: continuing to aggressively suppress inflation may trigger a collapse in asset prices; whereas tolerating a higher level of inflation could help maintain financial stability and asset prices.

An increasing number of market participants have begun to accept a judgment: in future policy games, the Federal Reserve is more likely to choose to 'protect the market' at critical moments, rather than 'protect inflation.' This means that the long-term inflation center may shift upwards, but liquidity release in the short term will be more cautious and intermittent, rather than forming a continuous wave of easing. For risk assets, this is an unfriendly environment— the speed of interest rate declines is insufficient to support valuations, while the uncertainty of liquidity continues to exist. It is in this macro context that the impact brought by this round of Super Central Bank Week far exceeds a mere 25 basis point rate cut. It signifies a further correction of market expectations for the 'era of unlimited liquidity' and lays the groundwork for subsequent interest rate hikes by the Bank of Japan and year-end liquidity contraction. For the crypto market, this does not signify the end of a trend, but it is a critical stage that requires recalibrating risk and re-understanding macro constraints.

Two, Bank of Japan's Interest Rate Hike: The Real 'Liquidity Demolition Expert'

If the Federal Reserve's role during the Super Central Bank Week is to make the market disappointed and revise expectations regarding 'future liquidity,' then the action that the Bank of Japan is set to take on December 19 is closer to a 'demolition operation' directly affecting the underlying global financial structure. The current market expects a 90% probability that the Bank of Japan will raise interest rates by 25 basis points, from 0.50% to 0.75%. This seemingly moderate rate adjustment means that Japan will push its policy rate to its highest level in thirty years. The key issue is not the absolute value of the rate itself but the chain reaction this change will cause to the global capital operating logic.

Over the past decade, a structural consensus has gradually formed in global capital markets: the yen is a 'permanent low-cost currency.' Supported by long-term ultra-loose policies, institutional investors can borrow yen at near-zero or even negative costs, then exchange it for dollars or other high-yield currencies, allocating to U.S. stocks, crypto assets, emerging market bonds, and various risk assets. This model is not short-term arbitrage but has evolved into a long-term funding structure worth trillions of dollars, deeply embedded in the global asset pricing system. Due to its prolonged duration and high stability, yen arbitrage trading has gradually transformed from a 'strategy' into a 'background assumption,' rarely priced as a core risk variable by the market. However, once the Bank of Japan clearly enters an interest rate hike path, this assumption will be forced to reassess. The impact of rate hikes goes beyond a marginal increase in financing costs; more importantly, it will change the market's expectations for the long-term direction of the yen exchange rate. When policy rates rise and inflation and wage structures change, the yen will no longer just be a passive depreciating financing currency but could turn into an asset with appreciation potential. Under this expectation, the logic of arbitrage trading will be fundamentally disrupted. Originally, capital flows centered around 'interest rate differentials' will start to add considerations of 'exchange rate risk,' rapidly deteriorating the risk-return ratio of funds.

In this situation, the choices faced by arbitrage funds are not complex but extremely destructive: either close positions early to reduce exposure to yen liabilities; or passively endure the dual squeeze of exchange rates and interest rates. For large-scale, highly leveraged funds, the former is often the only viable path. The specific way to close positions is also very direct—selling off risk assets held to buy back yen for repayment. This process does not discriminate between asset quality, fundamentals, or long-term prospects, but instead aims solely to reduce overall exposure, thus exhibiting clear 'indiscriminate selling' characteristics. U.S. stocks, crypto assets, and emerging market assets often come under pressure simultaneously, resulting in highly correlated declines. Historical data has repeatedly verified the existence of this mechanism. In August 2025, the Bank of Japan unexpectedly raised the policy rate to 0.25%. This magnitude is not considered aggressive in traditional terms, but it triggered a violent reaction in global markets. Bitcoin fell 18% in a single day, and multiple risk assets faced pressure simultaneously, taking nearly three weeks for the market to gradually recover. The severity of that shock was precisely because the rate hike came unexpectedly, forcing arbitrage funds to rapidly deleverage without preparation. The upcoming meeting on December 19, however, is not unlike that previous 'black swan' event, but more akin to a 'gray rhino' that has already revealed its presence. The market has anticipated the rate hike, but the expectation itself does not mean that risks have been fully digested, especially in the context of larger rate hikes compounded with other macro uncertainties.

What is more noteworthy is that the macro environment in which this interest rate hike by the Bank of Japan occurs is more complex than in the past. Global major central bank policies are diverging, with the Federal Reserve nominally cutting rates while tightening future easing space at the expectation level; the European Central Bank and the Bank of England are relatively cautious; while the Bank of Japan has become one of the few major economies clearly tightening policy. This policy divergence will exacerbate the volatility of cross-currency capital flows, making the liquidation of arbitrage trades no longer a one-time event, but possibly evolving into a phased, repeated process. For the crypto market, which heavily depends on global liquidity, the continued existence of this uncertainty means that the center of price fluctuations may remain at a high level for some time. Therefore, the Bank of Japan's interest rate hike on December 19 is not just a regional monetary policy adjustment, but an important node that may trigger a global funding structure rebalancing. What it 'demolishes' is not just the risk of a single market, but the low-cost leverage assumptions that have long accumulated in the global financial system. In this process, crypto assets often bear the brunt of the shock due to their high liquidity and high beta attributes. This shock does not necessarily mean a reversal of the long-term trend, but it is almost destined to amplify volatility, lower risk appetite in the short term, and force the market to reassess the funding logic that has long been taken for granted.

Three, Christmas Holiday Market: The Underestimated 'Liquidity Amplifier'

Starting from December 23, major institutional investors in North America gradually entered the Christmas holiday mode, and global financial markets subsequently entered the most typical and easily underestimated liquidity contraction phase of the year. Unlike macro data or central bank decisions, holidays do not change any fundamental variables, but will significantly weaken the market's 'ability to absorb shocks' in a short time. For a market like crypto assets, which heavily relies on continuous trading and market-making depth, this structural liquidity decline is often more destructive than a single negative event. Under normal trading conditions, the market has sufficient counterparties and risk absorption capacity. A large number of market makers, arbitrage funds, and institutional investors continuously provide two-way liquidity, allowing selling pressure to be dispersed, delayed, or even hedged.

What is more concerning is that the Christmas holiday does not occur in isolation but coincides with a time when a series of macro uncertainties are being concentrated and released. The 'rate cut but hawkish' signal released by the Federal Reserve during the Super Central Bank Week has significantly tightened market expectations for future liquidity; meanwhile, the interest rate hike decision by the Bank of Japan on December 19 is shaking the long-standing funding structure of global yen arbitrage trading. Normally, these two types of macro shocks can be gradually digested by the market over a long period, with prices being repriced through repeated games. However, when they happen to appear during the Christmas holiday, which is the period of weakest liquidity, their impact is no longer linear but exhibits a significant amplification effect. The essence of this amplification effect is not the panic itself, but the change in market mechanisms. Insufficient liquidity means that the price discovery process is compressed, and the market cannot gradually absorb information through continuous trading, but is instead forced to adjust through more severe price jumps. For the crypto market, declines in such an environment often do not require new major negative news; a concentrated release of existing uncertainties is enough to trigger a chain reaction: price drops lead to leveraged positions being passively liquidated, which further increases selling pressure, and that selling pressure is rapidly amplified in shallow order books, ultimately resulting in severe fluctuations in a short time. Historical data shows that this pattern is not an isolated case. Whether in the early cycle of Bitcoin or in the mature stage in recent years, the period from late December to early January has always been a time of significantly higher volatility in the crypto market compared to the annual average. Even in relatively stable macro years, the decline in holiday liquidity often accompanies rapid price increases or declines; and in years with high macro uncertainty, this time window is more likely to become an 'accelerator' for trending markets. In other words, holidays do not determine direction, but greatly amplify price performance once a direction is confirmed.

Four, Conclusion

In summary, the current pullback experienced by the crypto market is more akin to a phase re-pricing triggered by changes in global liquidity paths rather than a simple reversal of a trending market. The Federal Reserve's rate cut has not provided new valuation support for risk assets; instead, its limitations on future easing space in forward guidance have led the market to gradually accept a new environment of 'declining interest rates but insufficient liquidity.' Against this backdrop, overvalued and highly leveraged assets naturally face pressure, and the adjustment in the crypto market has a clear macro logical basis.

At the same time, the Bank of Japan's interest rate hike constitutes the most structurally significant variable in this round of adjustments. For a long time, the yen has been the core financing currency for global arbitrage trading, and once its low-cost assumption is broken, the resulting impact will not only be localized capital flows but also a systematic contraction of global risk asset exposure. Historical experience shows that such adjustments often have phases and are repeated; their impact will not be fully released in a single trading day but will gradually complete the deleveraging process through sustained volatility. Due to their high liquidity and high beta attributes, crypto assets often reflect pressure first in this process, but that does not necessarily mean their long-term logic is denied.

For investors, the core challenge at this stage is not to judge the direction, but to identify changes in the environment. When policy uncertainty and liquidity contraction coexist, the importance of risk management will significantly outweigh trend judgment. Truly valuable market signals often appear after macro variables gradually stabilize and arbitrage funds complete their phase adjustments. In terms of the crypto market, the current situation resembles a transitional period of recalibrating risk and rebuilding expectations, rather than the final chapter of the market. The medium-term direction of future prices will depend on the actual recovery of global liquidity after the holiday and whether the policy divergence among major central banks further deepens. I am Hengtong, here to guide you through a different crypto market.