Author: Tuo Luo Finance

The long-awaited interest rate cut has arrived as expected, but the market is not as jubilant as usual.

In the early hours of December 19, Beijing time, the Federal Reserve announced its last interest rate decision of the year, deciding to lower the federal funds rate target range by 25 basis points to 4.25%-4.50%, successfully achieving a third consecutive rate cut. So far, the cumulative reduction in this round of rate cuts by the Federal Reserve has reached 100 basis points.

Even with profit-taking behavior, the release of liquidity is a significant boon for risk markets, but this time, it is different. The U.S. stock market fell first as a sign of respect, taking action to reflect the pricing. According to Choice data, as of the close on December 18, the Nasdaq fell 3.56%, the S&P 500 index fell 2.95%. The Dow Jones Industrial Average plunged by over a thousand points, down 2.58%, marking its 10th consecutive day of decline, the longest losing streak since October 1974.

The cryptocurrency market followed suit, with Bitcoin briefly dropping below $100,000, hitting a low of $99,000, while ETH saw a maximum drop of over 7.2%, and altcoins collectively fell by more than 10%. Why did this rate cut lead to such results?

01 Hawkish Expectations Trigger Market Panic, Powell Contradicts Trump

A rate cut is a good thing, but the speculation in risk markets revolves around two words—expectations. Federal Reserve Chairman Powell issued a long-awaited hawkish statement alongside the rate cut, indicating that the December rate cut decision was more challenging but was the "right decision," emphasizing that the Federal Reserve will likely be "more cautious" when considering adjustments to the policy rate in the future. Whether the Federal Reserve will cut rates in 2025 will depend on future data rather than current forecasts, and further rate cuts will be considered only after inflation improves.

Compared to previous decisions that were relatively unanimous, this rate cut also saw divisions, with Cleveland Fed President Mester casting a dissenting vote against the rate decision, arguing that the rate cut should be skipped, reflecting that resistance to rate cuts is increasing.

In the economic outlook released by the Federal Reserve on the same day, the growth rate was revised upward, and the unemployment rate was lowered, also showing a hawkish stance. From the dot plot, based on this outlook, 10 out of 19 members of the Federal Open Market Committee believe that by the end of 2025, the federal funds rate target range will drop to between 3.75% and 4%. Considering the so-called "more cautious" approach, it seems that the Federal Reserve can only cut rates twice at most next year, a significant reduction from the four cuts expected in September.

Against this backdrop, the U.S. stock market, which had already digested the news of the December rate cut, saw a significant drop, as the future soft landing remains to be evaluated. In fact, from a macro perspective, the severity is still within a controllable range. Although hawkish rhetoric has emerged, the consensus remains that a rate cut in 2025 is likely, albeit with a higher neutral rate. From the Federal Reserve's perspective, this hawkish rhetoric is likely a preemptive warning to address the uncertainties of Trump's subsequent administration, thereby reserving some space to prevent inflation from being pushed up by Trump's policy proposals.

Although the expectations of rate cuts have a significant impact on risk markets, the disaster in the cryptocurrency market is even more severe. A single statement from Powell caused Bitcoin to drop over 5%, further collapsing the crypto market. According to Coinglass data, as of 5 PM, over 260,000 people globally were liquidated in the past 24 hours, with total liquidations reaching $780 million, including $661 million in long positions and $118 million in short positions.

At the press conference, when Powell was asked whether the Federal Reserve would establish a national Bitcoin reserve, he replied, "We are not allowed to own Bitcoin. The Federal Reserve Act specifies what the Federal Reserve can own, and the Federal Reserve is not seeking to change that. This is a matter for Congress to consider, but the Federal Reserve does not wish to amend the law."

Powell's attitude undoubtedly reflects a stance against cryptocurrencies, as the Federal Reserve does not consider including Bitcoin on its balance sheet and does not wish to discuss the issue. During his current term, Powell has clearly stated that he will not resign, and Trump does not have the power to replace him.

Coincidentally, just recently, Trump made his usual "greatness" claims, stating that he would do great things in the cryptocurrency field. When asked whether the U.S. would establish a Bitcoin strategic reserve similar to the oil reserve, he bluntly stated, "Yes, I think it will." Earlier, an anonymous transition team insider revealed that Trump hopes to see Bitcoin surpass $150,000 during his term, as cryptocurrencies represent "another stock market" for him. Considering Trump's explicit assertion that "the stock market is everything," this information carries a high degree of credibility.

On December 17, market news again surfaced, stating that Trump plans to establish a strategic Bitcoin reserve (SBR) through an executive order, intending to use the Treasury's Exchange Stabilization Fund (ESF) to purchase Bitcoin, which now exceeds $200 billion. On the same day, the Bitcoin Policy Institute drafted the full text of this executive order, stating that the order could take effect once signed by Trump upon taking office.

Amidst a series of stimulating messages, the national Bitcoin reserve plan seems just within reach, and the market has high hopes for it. Voting on Bitcoin reserves on Polymarket has risen from 25% to 40%, and yesterday Bitcoin surged, briefly hitting the new threshold of $110,000. However, Powell's remarks were undoubtedly a direct slap in the face to Trump; if the Federal Reserve does not cooperate, the so-called national reserve will clearly face significant obstacles.

02 Federal Reserve Uninterested, Bitcoin National Reserve Faces Many Challenges

Taking the Bitcoin bill proposed by Senator Cynthia Lummis as an example, this bill requires the government to purchase up to 200,000 Bitcoins annually over five years, totaling 1 million. Based on a price of $100,000 per Bitcoin, excluding premiums during purchases, the government would need to raise at least $100 billion. In terms of operational details, the funding sources could consist of three parts: first, using the Federal Reserve's Treasury remittances, with a maximum of $6 billion per year. This option is unlikely because the Federal Reserve is currently in a state of loss, with losses exceeding $200 billion. In fact, since September 2023, the Federal Reserve has not remitted any funds to the Treasury. Second, transferring from the Federal Reserve's capital surplus account to the Treasury's general fund, which has been used in the FAST (Fixing America's Surface Transportation) Act, but using it to purchase Bitcoin would likely raise public concerns about the Federal Reserve's independence.

Compared to the first two options, the third option is more feasible: adjusting the fair value of gold at market prices, allowing the Federal Reserve to marketize the profits from the official value of the Treasury's gold reserves. According to the Federal Reserve's financial report, the official reserve assets of the Federal Reserve include gold, special drawing rights, and coins, where gold refers to the Treasury's gold dollar certificates. Based on the official price of slightly over $42.22 per troy ounce, the nominal value is $11 billion. If calculated at a market price of $2,700, this reserve would reach $703.4 billion. In fact, across the three methods, regardless of how Bitcoin is purchased, the U.S. Treasury needs the Federal Reserve's strong support.

On the other hand, U.S. national reserve assets need to have high liquidity to help maintain the dollar's status as the international reserve currency and serve as a last resort for payment. From this perspective, the highly volatile Bitcoin seems to not meet the standards. If the U.S. government significantly purchases Bitcoin, although it would further drive up its price, it would highly concentrate Bitcoin on the government side. When it comes to large-scale selling, the slippage and volatility would have a substantial impact, potentially leading the government to bear significant impairment losses, not to mention that the rise of non-sovereign currencies would somewhat undermine global recognition of the dollar.

Due to various reasons, the Federal Reserve's dislike for cryptocurrencies runs deep, and Powell has repeatedly expressed his opposition to cryptocurrencies. It is worth noting that in this statement, Powell also left room for consideration, stating, "This is a matter for Congress to consider," meaning Congress could amend the bill to include Bitcoin in reserves, but given the complex entanglements of interests and the broad implications, the likelihood of functional amendments is minimal.

This is precisely why the purchase of the Exchange Stabilization Fund is relatively more credible. Unlike the Federal Reserve's path, this fund belongs to the U.S. Treasury, and with the president's consent, the Treasury can bypass Congress to allocate funds, directly using the ESF for trading in gold, foreign exchange, and other credit and securities instruments, making its use relatively flexible.

Overall, although Trump has secured both houses during his current term, and power is highly concentrated, and he is actively announcing related plans, merely from a probabilistic perspective, the likelihood of Bitcoin becoming a U.S. strategic reserve asset remains very low. However, for the unconventional Trump, anything is possible. After all, from a practical standpoint, the U.S. government already holds over 210,000 Bitcoins, ranking first among global governments. If a partial reserve is realized, the appreciation of Bitcoin could still play a very positive role for the heavily indebted U.S.

03 Institutional FOMO Rises, Crypto Market Faces Path Divergence

In the long term, despite briefly experiencing a Black Thursday, the outlook for the cryptocurrency market remains bright under foreseeable regulatory benefits. For the upcoming 2025, institutions are also showing highly optimistic sentiments.

Bitwise has provided clear price data in its 2025 forecast, stating that the number of countries holding Bitcoin will double, Bitcoin ETFs will see more inflows, and Bitcoin will reach $200,000. If a strategic reserve is realized, there is no upper limit, potentially reaching a price of one million dollars by 2029. Ethereum is expected to undergo a narrative shift in 2025, driven by Layer 2, stablecoins, and tokenization projects, reaching $7,000, while Solana aims for $750. Additionally, it states that 2025 will be the year of IPOs for crypto companies, with Coinbase becoming the largest brokerage.

VanEck's expectations are clearer in stages, indicating that the cryptocurrency bull market will continue to develop in 2025, reaching its first peak in the first quarter. At this cycle's peak, Bitcoin is expected to be priced around $180,000, while Ethereum will exceed $6,000. Other well-known projects, such as Solana and Sui, may break through $500 and $10, respectively. After the first quarter, Bitcoin's price is expected to pull back by 30%, while altcoins may see a larger decline of up to 60%. The market will consolidate in the summer and then rebound in the fall, with major tokens regaining growth and returning to previous historical highs by the end of the year.

Compared to Bitwise, VanEck is more optimistic, believing that Bitcoin reserves will become a reality, with the federal government or at least one state (such as Pennsylvania, Florida, or Texas) establishing Bitcoin reserves. They also expect the number of countries utilizing government resources for mining to increase from the current 7 to double digits. On the other hand, VanEck has also made predictions for specific sectors, believing that stablecoins, DeFi, NFTs, Bitcoin Layer-2, RWA, and AI agents will experience rapid development. By 2025, DEX trading volume is expected to exceed $4 trillion, accounting for 20% of CEX spot trading volume; NFT trading volume will reach $30 billion; Bitcoin Layer-2 total value locked (TVL) will reach 100,000 BTC; the total value of tokenized securities will exceed $50 billion; and on-chain activities of AI agents will also surpass 1 million.

Presto's predictions are also consistent, stating that Bitcoin's price will reach $210,000, the ETH/BTC ratio will rebound to 0.05, and Solana will break through $1,000. They also believe that a sovereign nation or an S&P 500 company will incorporate Bitcoin into its treasury reserves.

From last year's predictions, VanEck's success rate is about 56.6%, while Bitwise is around 50%, making their credibility quite good from an institutional perspective. Overall, around $200,000 is the peak expectation for Bitcoin in the coming year, while Ethereum is expected to be around $6,000 to $7,000, indicating a very strong bullish sentiment among institutions.

However, given the current clear path divergence, the seemingly bright bull market still carries risks, especially for altcoins, which are most susceptible to liquidity impacts. In fact, even now, many altcoin holders find that their coin prices have not yet returned to previous bear market levels.

The lack of market liquidity can also be seen from Binance's new tokens; the "universe exchange" listing effect is continuing to weaken, with price surges followed by pullbacks becoming the main theme. According to statistics from Tuo Luo Finance, as of December 19, the average decline of the 10 tokens newly listed on Binance since November is over 57.94%. For example, PENGU, which was just listed on December 17, surged to $0.07 before quickly retracting, currently reported at $0.033, a decline of 51.81%.

It is precisely because of the market difficulties and numerous doubts that the Binance wallet recently launched the Binance Alpha feature, hoping to invigorate trading volume by exploring low-market-cap potential tokens and stimulate the wallet ecosystem, maintaining its leading advantage in fierce market competition. However, from the current perspective, while short-term platform activity has increased, the long-term effects remain to be discussed.

In this regard, holding mainstream tokens may be the best choice in this bull market. Currently, the crypto market has rebounded, with Bitcoin reported at $101,652 and Ethereum at $3,674.

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