How the latest Fed decision will impact cryptocurrency prices in 2025

You might think that decentralized cryptocurrencies should not be affected by central bank decisions, but this is not the case. As cryptocurrencies become increasingly integrated into global financial markets, their price movements are increasingly influenced by the policies of the Federal Reserve, the world’s most powerful central bank.

You might think that decentralized cryptocurrencies should not be affected by central bank decisions, but this is not the case. As cryptocurrencies become increasingly integrated into global financial markets, their price movements are increasingly influenced by the policies of the Federal Reserve, the world’s most powerful central bank.

The latest decision of the Federal Reserve: reduce interest rates and continue tightening

The latest decision of the Federal Reserve: reduce interest rates and continue tightening

At the Federal Open Market Committee (FOMC) meeting in December 2024, the Fed lowered interest rates by 25 basis points, bringing the target range to 4.25%-4.5%. This is the third consecutive rate cut since September and November. Although the interest rate cut itself was already expected by the market, the subsequent signal sent by the Federal Reserve surprised the market: it will adopt a more cautious easing policy and is expected to cut interest rates only twice in 2025, with each cut of 25 basis points instead of the previous one. Four rate cuts expected.

The policy shift reflects the Fed's confidence in the U.S. economy, indicating stronger-than-expected economic growth. However, it also exposed the Fed's concerns about persistently high inflation, which remains above its 2% target. The Fed's latest forecast shows core inflation will remain at 2.5% in 2025, higher than previous estimates.

Additionally, the Fed reiterated its commitment to quantitative tightening (QT), which involves selling assets to shrink its balance sheet. The implementation of this policy will further remove market liquidity and continue to tighten monetary conditions.

What does this mean for cryptocurrencies?

What does this mean for cryptocurrencies?

Cryptocurrencies are often viewed as risk assets and thrive in liquidity-rich environments. The Federal Reserve’s reduction in interest rate cuts and continued implementation of quantitative tightening indicate that financial conditions will continue to tighten, which may weigh on the cryptocurrency market in the short term.

Bitcoin, the largest and oldest cryptocurrency on the market, is more resilient than altcoins when liquidity is tight. Bitcoin is often able to attract more capital amid tighter liquidity because it is seen as "digital gold," a safe haven in volatile markets. While fewer rate cuts and quantitative tightening may limit Bitcoin’s gains in the short term, that doesn’t mean it can’t outperform in the long term. History shows that Bitcoin can thrive despite tough macroeconomic conditions, with its scarcity and unique market position providing strong support for its future performance.

Impact on altcoins

Impact on altcoins

The picture may not be so positive for altcoins, as they tend to rely more on ample liquidity to drive prices higher. Without sufficient liquidity, altcoins often struggle to follow Bitcoin’s lead.

As a result, “altcoin season” — the period when smaller cryptocurrencies significantly outperform Bitcoin — may be delayed. Altcoins are more sensitive to liquidity, and if the market lacks sufficient capital inflows, their performance will usually be weak. Past market performance has also proven that altcoins are likely to be suppressed by a strong U.S. dollar and continued quantitative tightening until broader market conditions improve..

Long-term outlook: The bull market remains intact

While the Federal Reserve’s latest policy decisions err on the side of caution, it’s important to recognize that the cryptocurrency market as a whole is still in a bull phase. Bitcoin crosses the $100,000 mark in 2024, a major milestone that signals the continued strengthening of the cryptocurrency’s underlying adoption trend. From institutional interest to technological innovation, the fundamentals of the cryptocurrency market remain strong.

For those long-term investors with a higher risk tolerance, the Fed's statement should be viewed as a short- to medium-term factor rather than a major concern. While monetary tightening may slow cryptocurrency momentum in the short term, the digital asset class’s growth potential remains strong in the longer term.

As always, patience and insight will be the key to successfully investing in the cryptocurrency market. Bitcoin has repeatedly proven that it can adapt to different macroeconomic environments and maintain growth. While altcoins may face challenges in the short term, they may also rebound as liquidity conditions improve, creating opportunities for outsized returns.

Which Cryptocurrency Should You Buy in Your Next Trade?

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