The gates of global liquidity have opened once again, and cryptocurrency, once considered a 'marginal asset', is now directly targeting the Federal Reserve's faucet.
This is not just a rate cut; it is a global liquidity shift. The Federal Reserve injected massive liquidity into the market through various tools in just ten days, and the cryptocurrency market has quietly become an important participant in this liquidity feast.
When yields in traditional finance are artificially suppressed, capital flows like a flood seeking an exit, inevitably moving towards higher-yielding assets. Data shows that the scale of negative-yield bonds has once again surpassed $18 trillion, making Bitcoin's annualized volatility appear almost like a 'stable asset' in the eyes of institutions.
01 Liquidity combination punch: A review of the Federal Reserve's $38 billion 'sprint'
In the past ten days, the Federal Reserve has played a dazzling 'combination punch.' On December 1, the Federal Reserve injected $13.5 billion in liquidity into the banking system through overnight repurchase operations, marking the second-largest single-day injection since the COVID-19 pandemic.
Immediately following, on December 9, Federal Reserve Chairman Powell announced a 25 basis point interest rate cut, coupled with $15.7 billion in emergency injections and an expected subsequent inflow of $1.5 trillion, completely reversing market liquidity expectations.
A total liquidity injection amounting to hundreds of billions of dollars marks a decisive turning point in Federal Reserve policy, officially ending the quantitative tightening (QT) program that extracted over $2 trillion from the market since 2022.
The rapid change in the liquidity environment has caught many traditional investors off guard. However, savvy capital seems to have already sensed the shift, as evidenced by Bitcoin's 37% surge within 24 hours of the announcement, which is the best proof of the market's sensitivity to Federal Reserve policy.
02 Not just interest rate cuts: a covert 'balance sheet expansion' is underway
The market is generally focused on whether the Federal Reserve will cut interest rates by 25 basis points, but true professionals are looking at a more critical variable: the balance sheet.
Wall Street insiders reveal that the Federal Reserve may soon announce a short-term debt purchase plan of $45 billion per month, as part of a new round of 'reserve management operations.' This is essentially another form of balance sheet expansion, allowing the market to enter a liquidity easing state ahead of interest rate cuts.
However, unlike the quantitative easing during the 2020 pandemic, this operation is referred to by experts as 'covert quantitative easing.' Its direct purpose is to ensure the health of liquidity in the money market, rather than directly stimulating the economy or the market.
This liquidity injection is more targeted; it executes by purchasing securities and agreeing to sell them back on a specific date in the future, aiming to adjust the currency supply in the market and alleviate the short-term funding pressure on the banking system.
03 The siphon effect in the crypto market: funds are flowing quietly
Expectations for improved liquidity have begun to trigger a reallocation of funds. The subscription volume of BlackRock's crypto ETF has reached $2.4 billion, 7.8 times the same period last year.
Even more surprisingly, Coinbase's institutional custody assets have surpassed $80 billion, while Fidelity's digital asset platform has also seen trading volume increase by 420% compared to last year. These figures indicate that the infrastructure of the crypto market is far more mature than in the past.
The differentiation in capital flows also reflects the market positioning of different cryptocurrencies. On-chain data shows that Bitcoin, as 'digital gold,' is more favored, while the funding rate in its futures market remains at 0.01%, indicating that investors are viewing it more as a long-term store of value.
Meanwhile, Ethereum has become an important entry point for institutions into the DeFi space, thanks to its staking APY rising to 5.2% and the increasing locked volume in Layer 2 networks.
04 My analysis viewpoint: Caution in the short term and optimism in the long term coexist
In the current delicate market environment, I maintain a cautiously optimistic attitude.
On the optimistic side, the overall direction of improving liquidity conditions has become clear. As the Federal Reserve's policy shifts, traditional financial institutions are also beginning to soften their attitudes towards crypto assets. Bank of America has allowed wealth advisors to recommend allocating 1%-4% of crypto assets to clients, which means Bitcoin is entering the 'standard option' list of traditional wealth management in the U.S.
However, short-term risks should not be ignored. The possibility of the Bank of Japan raising interest rates stands at 98%, which could end decades of yen carry trading and trigger a capital return from risk assets (including cryptocurrencies).
Historically, Bitcoin has experienced significant corrections of 20% to 30% following several past interest rate hikes by the Bank of Japan.
Technical analysis shows that the two-year simple moving average (2YSMA) at around $82,800 is a significant boundary for Bitcoin's bull and bear cycles. As long as the price remains above this level, the long-term upward trend remains intact.
05 Investor strategy suggestion: How to position in this contradictory market
In the face of contradictory market signals, I recommend adopting a 'core-satellite' strategy: allocating most of the assets to core assets like Bitcoin and Ethereum, while using a small portion of funds to position in promising altcoins.
Data shows that despite overall market volatility, the long-term layout logic of institutional-level funds remains unchanged. MicroStrategy recently increased its Bitcoin holdings by approximately $963 million during the recent price correction, marking the company's largest buy in recent months.
For ordinary investors, timing diversification is key. Consider adopting a dollar-cost averaging strategy, increasing investment proportions appropriately during significant market corrections. At the same time, avoid using excessively high leverage, as warning signs have already appeared in the derivatives market.
Although the share of altcoins has fallen to a five-year low, funds are concentrating on Bitcoin, but this may also provide an opportunity for patient investors to position themselves.
Looking back at history, Bitcoin has just experienced its fourth consecutive monthly decline. After the first three (in April-June 2021, November 2021-January 2022, and April-June 2022), Bitcoin saw rebounds of varying degrees.
The 'sequel script' this time largely depends on whether the liquidity injected by the Federal Reserve can be sustained. The deep-seated changes in the global fiat currency system have already begun, and the role of cryptocurrencies in this transformation far exceeds that of a mere investment asset. How to participate in this will determine our wealth landscape in the coming years.
How do you think this global liquidity shift will affect the long-term development of cryptocurrencies? Feel free to share your thoughts in the comments!
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