Crypto Market Macro Report: Liquidity Repricing Amid Fed Rate Cuts, Bank of Japan Rate Hike, and the Christmas Holiday

I. Fed Rate Cut: The Path of Easing After Lowering Interest Rates

On December 11, the Fed 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 of a shift toward monetary easing. However, the market reaction quickly cooled, with both US stocks and crypto assets falling in tandem, and risk appetite shrinking significantly. This seemingly counterintuitive trend actually reveals a key fact in the current macro environment: a rate cut does not equate to liquidity easing. During this round of the "super central bank week," the message conveyed by the Fed was not "reopening the liquidity tap," but rather a clear constraint on future policy space. Looking at the policy details, changes in the dot plot delivered a substantial shock to market expectations. The latest forecasts show that the Fed may only cut rates once in 2026, significantly lower than the previously widely priced path of 2 to 3 cuts. More importantly, among the 12 voting members at this meeting, three explicitly opposed the rate cut, with two advocating for keeping rates unchanged. This divergence is not just marginal noise; it clearly indicates that the Fed's internal vigilance toward inflation risks is much higher than the market previously understood. In other words, this rate cut is not the beginning of an easing cycle, but more like a technical adjustment in a high-interest-rate environment to prevent financial conditions from tightening excessively.

For this reason, what the market truly expects is not a "one-off rate cut," but a clear, sustainable, and forward-looking easing path. The pricing logic of risk assets does not depend on the absolute level of current interest rates, but on the discounting of the future liquidity environment. When investors realize that this rate cut has not opened up new easing space, and may even preemptively lock in future policy flexibility, the original optimism is quickly corrected. The signal released by the Fed is akin to a "painkiller," temporarily alleviating tension but not addressing the underlying issue; meanwhile, the restraint 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 "all the good news is priced in." Long positions built around easing expectations begin to loosen, with high-valuation assets bearing the brunt. Growth and high-beta sectors in US stocks are the first to come under pressure, and the crypto market is no exception. The pullback in bitcoin and other major crypto assets is not due to a single negative factor, but rather a passive response to the reality that "liquidity will not return quickly." When futures basis converges, ETF marginal buying weakens, and overall risk appetite declines, prices naturally gravitate toward a more conservative equilibrium. A deeper change is reflected in the shifting risk structure of the US economy. Increasing research suggests that the core risk facing the US economy in 2026 may no longer be a traditional cyclical recession, but a demand-side contraction directly triggered by a sharp correction in asset prices. After the pandemic, the US saw the emergence of an "excess retirement" group of about 2.5 million people, whose wealth is highly dependent on the performance of the stock market and risk assets, creating a strong correlation between their consumption behavior and asset prices. If the stock market or other risk assets experience a sustained decline, this group's consumption capacity will shrink in tandem, creating negative feedback for the broader economy. In this economic structure, the Fed's policy options are further constrained. On the one hand, stubborn inflationary pressures persist, and premature or excessive easing could reignite price increases; on the other hand, if financial conditions continue to tighten and asset prices undergo a systemic correction, the wealth effect could quickly transmit to the real economy, triggering a demand slump. The Fed is thus caught in an extremely complex dilemma: continuing to strongly suppress inflation could trigger an asset price collapse, while tolerating higher inflation levels could help maintain financial stability and asset prices.

More and more market participants are beginning to accept the judgment that in future policy games, the Fed is more likely to "protect the market" at critical moments, rather than "protect inflation." This means that the long-term inflation anchor may move higher, but short-term liquidity releases will be more cautious and intermittent, rather than forming a sustained wave of easing. For risk assets, this is not a friendly environment—the pace of interest rate declines is insufficient to support valuations, while liquidity uncertainty persists. Against this macro backdrop, the impact of this round of the "super central bank week" goes far beyond a single 25 basis point rate cut. It marks a further correction in market expectations for the "era of unlimited liquidity," and sets the stage for the Bank of Japan's subsequent rate hike and year-end liquidity contraction. For the crypto market, this is not the end of the trend, but a critical stage where risks must be recalibrated and macro constraints re-understood.

II. Bank of Japan Rate Hike: The Real "Liquidity Demolition Expert"

If the Fed's role during the super central bank week was to disappoint and correct market expectations for "future liquidity," then the Bank of Japan's upcoming action on December 19 is more akin to a "demolition operation" directly affecting the foundation of the global financial structure. The market now assigns nearly a 90% probability to the Bank of Japan raising rates by 25 basis points, lifting the policy rate from 0.50% to 0.75%. This seemingly mild adjustment would push Japan's 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 in the logic of global capital flows. For a long time, Japan has been the most important and stable source of low-cost funding in the global financial system. Once this premise is broken, the impact will far exceed the Japanese domestic market.

Over the past decade or more, global capital markets have gradually formed an almost default structural consensus: the yen is a "permanently low-cost currency." Supported by long-term ultra-loose policies, institutional investors could borrow yen at near-zero or even negative costs, convert it into US dollars or other high-yield currencies, and allocate to US stocks, crypto assets, emerging market bonds, and various risk assets. This model is not a short-term arbitrage, but has evolved into a long-term capital structure worth trillions of dollars, deeply embedded in the global asset pricing system. Precisely because it has lasted so long and been so stable, yen carry trades have gradually shifted from being a "strategy" to a "background assumption," rarely priced as a core risk variable by the market. However, once the Bank of Japan clearly enters a rate hike cycle, this assumption will be forced to be re-evaluated. The impact of rate hikes is not limited to a marginal increase in funding costs; more importantly, it changes market expectations for the long-term direction of the yen exchange rate. When policy rates rise and inflation and wage structures change, the yen is no longer just a passively depreciating funding currency, but may become an asset with appreciation potential. Under this expectation, the logic of carry trades will be fundamentally disrupted. Capital flows that were originally centered on "interest rate differentials" will begin to factor in "exchange rate risk," rapidly worsening the risk-return profile of funds.

In this situation, the choices facing arbitrage funds are not complicated, but are highly disruptive: either close positions early to reduce 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 method of closing positions is also extremely direct—selling held risk assets, converting back to yen, and repaying financing. This process does not distinguish between asset quality, fundamentals, or long-term prospects, but aims solely to reduce overall exposure, thus exhibiting a clear "indiscriminate selling" characteristic. US stocks, crypto assets, and emerging market assets often come under pressure simultaneously, resulting in highly correlated declines. History has repeatedly validated this mechanism. In August 2025, the Bank of Japan unexpectedly raised the policy rate to 0.25%. Although this magnitude was not aggressive by traditional standards, it triggered a violent reaction in global markets. Bitcoin fell 18% in a single day, multiple risk assets came under pressure simultaneously, and it took the market nearly three weeks to gradually recover. The severity of that shock was precisely because the rate hike was sudden, and arbitrage funds were forced to deleverage quickly without preparation. The upcoming December 19 meeting, however, is different from that "black swan" event and is more like a "gray rhino" whose presence is already known. The market already expects a rate hike, but expectation itself does not mean the risk has been fully digested, especially when the hike is larger and compounded by other macro uncertainties.

More noteworthy is that the macro environment surrounding this Bank of Japan rate hike is more complex than in the past. Major global central banks are diverging in their policies: the Fed is nominally cutting rates but tightening future easing space in its guidance; the European Central Bank and Bank of England are relatively cautious; and the Bank of Japan is one of the few major economies clearly tightening policy. This policy divergence will increase the volatility of cross-currency capital flows, making the unwinding of carry trades not a one-off event, but a phased and recurring process. For the crypto market, which is highly dependent on global liquidity, the continued existence of this uncertainty means that price volatility may remain elevated for some time. Therefore, the Bank of Japan's rate hike on December 19 is not just a regional monetary policy adjustment, but a key event that could trigger a global rebalancing of capital structures. What it "demolishes" is not the risk of a single market, but the long-standing low-cost leverage assumption embedded in the global financial system. In this process, crypto assets, due to their high liquidity and high beta characteristics, often bear the brunt of the impact. This shock does not necessarily mean a reversal of the long-term trend, but it is almost certain to amplify short-term volatility, suppress risk appetite, and force the market to re-examine the funding logic that has been taken for granted for many years.

III. Christmas Holiday Market: The Underestimated "Liquidity Amplifier"

Starting December 23, major North American institutional investors gradually enter Christmas holiday mode, and the global financial market enters the most typical and most easily underestimated phase of liquidity contraction of the year. Unlike macro data or central bank decisions, holidays do not change any fundamental variables, but can significantly weaken the market's "absorption capacity" for shocks in a short period. For crypto assets, which are highly dependent on continuous trading and market-making depth, this structural decline in liquidity is often more destructive than a single negative event itself. In a normal trading environment, the market has sufficient counterparties and risk-bearing capacity. Numerous market makers, arbitrage funds, and institutional investors continuously provide two-way liquidity, allowing selling pressure to be dispersed, delayed, or even hedged.

 What is even more concerning is that the Christmas holiday does not occur in isolation, but coincides with a period when a series of macro uncertainties are being released. The "rate cut but hawkish" signal released by the Fed during the super central bank week has already significantly tightened market expectations for future liquidity; at the same time, the Bank of Japan's upcoming rate hike decision on December 19 is shaking the long-standing funding structure of global yen carry trades. Under normal circumstances, these two types of macro shocks could be gradually digested by the market over a longer period, with prices being repriced through repeated games. But when they happen to occur during the Christmas holiday, the weakest liquidity window, their impact is no longer linear, but is clearly amplified. The essence of this amplification effect is not panic itself, but a change in market mechanisms. Insufficient liquidity means the price discovery process is compressed, and the market cannot gradually absorb information through continuous trading, but is instead forced to adjust through more dramatic price jumps. For the crypto market, declines in such an environment often do not require new major negatives—just a concentrated release of existing uncertainties is enough to trigger a chain reaction: price drops trigger forced liquidations of leveraged positions, which further increase selling pressure, and this selling pressure is quickly amplified in thin order books, ultimately resulting in sharp short-term volatility. Historical data shows that this pattern is not an exception. Whether in the early cycles of bitcoin or in recent mature years, late December to early January has always been a period when crypto market volatility is significantly higher than the annual average. Even in years with relatively stable macro environments, holiday liquidity declines are often accompanied by rapid price surges or drops; in years with high macro uncertainty, this time window is even more likely to become an "accelerator" for trending markets. In other words, holidays do not determine direction, but greatly amplify price movements once the direction is confirmed.

IV. Conclusion

Overall, the current correction experienced by the crypto market is more akin to a phase of repricing triggered by changes in global liquidity paths, rather than a simple reversal of a trending market. The Fed's rate cut has not provided new valuation support for risk assets; on the contrary, its forward guidance limiting future easing space has led the market to gradually accept a new environment of "declining rates but insufficient liquidity." In this context, high-valuation and high-leverage assets naturally face pressure, and the adjustment in the crypto market has a clear macro logic foundation.

At the same time, the Bank of Japan's rate hike is the most structurally significant variable in this round of adjustment. The yen has long been the core funding currency for global carry trades, and once its low-cost assumption is broken, the resulting impact is not just a local capital flow, but a systemic contraction of global risk asset exposures. Historical experience shows that such adjustments are often phased and repetitive, with their impact not fully released in a single trading day, but gradually completed through sustained volatility and deleveraging. Crypto assets, due to their high liquidity and high beta characteristics, often reflect this pressure first in the process, but this does not necessarily negate their long-term logic.

For investors, the core challenge at this stage is not to judge direction, but to identify environmental changes. When policy uncertainty and liquidity contraction coexist, risk management becomes significantly more important than trend prediction. Truly valuable market signals often appear after macro variables are gradually realized and arbitrage funds complete their phased adjustments. For the crypto market, the current period is more like a transition for recalibrating risk and rebuilding expectations, rather than the end of the cycle. The medium-term direction of future prices will depend on the actual recovery of global liquidity after the holidays and whether the policy divergence among major central banks deepens further.