1. Federal Reserve Rate Cuts: The Easing Path After Rate Reductions

On December 11, the Federal Reserve announced a 25 basis point rate cut as scheduled. On the surface, this decision was highly aligned with market expectations and was even interpreted at one point as a sign that monetary policy was beginning to shift toward easing. However, market reactions quickly cooled, with US stocks and cryptocurrencies declining in tandem and risk appetite noticeably shrinking. This seemingly counterintuitive trend actually reveals a key fact in the current macro environment: rate cuts do not automatically equate to liquidity easing. During this week of major central bank meetings, the Fed’s message was not “releasing more liquidity,” but rather a clear constraint on future policy space.

From the policy details, changes in the dot plot caused substantial shocks to market expectations. The latest forecasts suggest that by 2026, the Fed may only implement one rate cut, significantly below the 2-3 cuts previously priced in by markets. More importantly, in the voting structure of this meeting, 3 out of 12 voting members explicitly opposed the rate cut, with 2 advocating for holding rates steady. This divergence is not fringe noise but clearly indicates that the Fed’s internal vigilance over inflation risks is much higher than market previously understood. In other words, this rate cut is not the start of an easing cycle but rather a technical adjustment in a high-interest-rate environment to prevent financial conditions from tightening excessively.

Therefore, the market’s true expectation is not a “one-time rate cut,” but a clear, sustainable, and forward-looking easing path. The valuation logic of risk assets depends not on the current absolute interest rate level but on the discounting of future liquidity conditions. When investors realize that this rate cut does not open new easing space but may even preemptively lock in future policy flexibility, optimistic expectations are quickly revised downward. The signals from the Fed resemble a “painkiller,” providing temporary relief but not addressing the underlying issues; meanwhile, the cautious tone in forward guidance forces markets to reassess future risk premiums.

In this context, rate cuts become a classic “diminishing bullish signal.” Long positions built on easing expectations begin to unwind, especially in high-valuation assets. Growth stocks and high-beta sectors in US equities are among the first to come under pressure, and the crypto market is no exception. The correction in Bitcoin and other mainstream cryptocurrencies is not driven by a single negative factor but a passive reaction to the reality that “liquidity will not return quickly.” When futures basis narrows, ETF marginal buying weakens, and overall risk appetite declines, prices naturally gravitate toward more conservative equilibrium levels.

Deeper changes are reflected in the shifting risk structure of the US economy. Increasing research indicates that by 2026, the core risk facing the US economy may no longer be a traditional cyclical recession but a demand-side contraction triggered directly by significant asset price corrections. Post-pandemic, the US has seen a “super-retirement” cohort of about 2.5 million people whose wealth heavily depends on stock and risk asset performance, with consumption closely linked to asset prices. If stock markets or other risk assets decline persistently, this group’s consumption capacity will contract accordingly, creating negative feedback for the overall economy.

In this economic structure, the Fed’s policy space is further constrained. On one hand, persistent inflationary pressures mean premature or excessive easing could reignite price rises; on the other hand, if financial conditions continue to tighten and asset prices experience systemic corrections, the wealth effect could rapidly transmit to the real economy, triggering demand declines. The Fed faces a highly complex dilemma: continue to suppress inflation forcefully, risking asset price collapses; or tolerate higher inflation levels to maintain financial stability and asset prices.

An increasing number of market participants accept a judgment: in future policy battles, the Fed is more likely to choose “supporting the market” rather than “supporting inflation” at critical moments. This implies that the long-term inflation target may shift upward, but short-term liquidity releases will be more cautious and intermittent rather than a sustained easing wave. For risk assets, this environment is unfriendly—rate declines are insufficient to support valuations, and liquidity uncertainty persists.

In this macro context, the impact of this round of major central bank meetings is far more than a 25 basis point rate cut. It signifies a further revision of market expectations for an “unlimited liquidity era,” and sets the stage for subsequent rate hikes by the Bank of Japan and liquidity tightening at year-end.

For the crypto market, this is not the end of the trend but a critical phase to recalibrate risk and re-understand macro constraints.

2. Bank of Japan Rate Hike: The True “Liquidity Disruptor”

If the Fed’s role during the major central bank week was to cause market disappointment and correction regarding “future liquidity,” then the upcoming action by the Bank of Japan on December 19 is more akin to a “disarming operation” that directly impacts the underlying structure of the global financial system. The market currently prices in nearly a 90% probability of a 25 basis point rate hike, raising the policy rate from 0.50% to 0.75%. While this appears a modest adjustment, it means Japan will push its policy rate to the highest level in three decades.

The core issue is not the absolute number itself but the chain reaction this change triggers in global capital flows. Japan has long been the world’s most important and stable low-cost financing source within the global financial system. Once this premise is broken, the impact will extend far beyond Japan’s domestic market.

Over the past decade, a near-universal structural consensus has emerged: the yen is a “permanently low-cost currency.” Under prolonged ultra-loose monetary policy, institutional investors borrow yen at near-zero or negative costs, then convert to USD or other high-yield currencies to allocate into US stocks, crypto assets, emerging market bonds, and various risk assets. This is not short-term arbitrage but has evolved into a multi-trillion-dollar long-term capital structure deeply embedded in global asset pricing.

Because of its duration and stability, yen carry trades have gradually shifted from “strategy” to “background assumption,” rarely being priced as a core risk factor. However, once the BOJ signals a move into rate hikes, this assumption must be reassessed. The impact of rate hikes is not just marginally increasing financing costs but also changing market expectations of the yen’s long-term direction. When policy rates rise and inflation and wage structures shift, the yen may no longer be just a passive depreciating funding currency but could become an appreciating asset with upside potential.

Under this expectation, arbitrage logic is fundamentally disrupted. The core “interest rate differential” flow begins to overlay “exchange rate risk,” rapidly worsening the risk-reward profile of carry trades.

In this scenario, arbitrage funds face a stark choice: either close positions early, reducing yen liabilities; or passively endure dual pressure from exchange rates and interest rates. For large, highly leveraged funds, the former is often the only feasible path. The specific method of closing positions is straightforward—sell risk assets, convert to yen, and repay financing. This process does not discriminate based on asset quality, fundamentals, or long-term outlooks but aims solely to reduce overall exposure, resulting in “unselective selling.” US stocks, crypto assets, and emerging market assets often decline simultaneously, showing high correlation.

History has repeatedly confirmed this mechanism. In August 2025, the BOJ unexpectedly raised its policy rate to 0.25%. Though not aggressive by traditional standards, it triggered intense market reactions: Bitcoin plunged 18% in a single day, and many risk assets declined in unison. It took nearly three weeks for markets to recover. The shock was so severe because the rate hike was sudden, and arbitrage funds, unprepared, were forced to de-leverage rapidly.

The upcoming December 19 meeting differs from that “black swan” event; it resembles a “gray rhinoceros” whose presence is already apparent. Markets expect a rate hike, but expectations do not mean risks are fully digested—especially if the hike is larger and combined with other macro uncertainties.

Furthermore, the macro environment surrounding this BOJ rate hike is more complex than in the past. Major central banks are diverging in policy: the Fed nominally cuts rates but tightens future easing expectations; the ECB and BOE are cautious; Japan is among the few to clearly tighten. This policy divergence will increase volatility in cross-currency capital flows, making position unwinding less a one-time event and more a phased, recurrent process. For crypto markets, highly dependent on global liquidity, this persistent uncertainty suggests that price volatility may remain elevated for some time.

This BOJ rate hike is not just a regional monetary policy move but a key node that could trigger a global rebalancing of capital flows. It dismantles not just a single market’s risk but the long-held assumption of low-cost leverage embedded in the global financial system. During this process, crypto assets, with their high liquidity and high-beta nature, tend to be the first to feel the impact. This does not necessarily mean a long-term trend reversal but will almost certainly amplify short-term volatility, lower risk appetite, and force markets to revisit long-standing assumptions about capital flows.

3. Christmas Holiday Market: The Underestimated “Liquidity Amplifier”

Starting December 23, major North American institutional investors will gradually enter the Christmas holiday season, and global financial markets will enter one of the most typical—and often underestimated—phases 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 rely heavily on continuous trading and market-making depth, this structural liquidity decline is often more damaging than a single negative event. Under normal conditions, markets have sufficient counterparties and risk absorption capacity. Many market makers, arbitrage funds, and institutions provide two-way liquidity, allowing selling pressure to be dispersed, delayed, or hedged.

More importantly, the holiday period does not occur in isolation but coincides with a series of macro uncertainties being released. The Fed’s “hawkish rate cuts” signals during the major central bank week have already tightened expectations for future liquidity; simultaneously, the upcoming BOJ rate hike on December 19 is shaking the long-standing yen carry trade structure.

Normally, these macro shocks can be gradually absorbed over time, with prices adjusting through repeated negotiations. But when they happen during the holiday’s liquidity trough, their impact is no longer linear but significantly amplified. This amplification is not driven by panic but by changes in market mechanisms. Insufficient liquidity compresses the price discovery process, preventing markets from gradually absorbing information through continuous trading, forcing instead more violent price jumps.

In crypto markets, this environment often leads to declines that do not require major new negative news—just a concentrated release of existing uncertainties, enough to trigger chain reactions: falling prices cause leveraged positions to be passively liquidated, which further increases selling pressure, rapidly amplifying in shallow order books, resulting in sharp volatility in a short time. Historical data confirms this pattern: whether in early Bitcoin cycles or recent mature phases, late December to early January consistently shows volatility well above annual averages. Even in years with relatively stable macro conditions, holiday liquidity drops often coincide with rapid price surges or drops; in years with high macro uncertainty, this window tends to accelerate trend movements.

In short, holidays do not determine market direction but can greatly magnify the impact once the trend is confirmed.

4. Conclusion

Overall, the recent crypto correction resembles a phased re-pricing triggered by changes in global liquidity pathways rather than a simple trend reversal. The Fed’s rate cut did not provide new valuation support for risk assets; instead, its forward guidance limited future easing potential, leading markets to accept a new environment of “rate declines but insufficient liquidity.”

In this context, high-valuation and highly leveraged assets naturally face pressure, and the correction in crypto assets has a clear macro logic.

Meanwhile, the BOJ’s rate hike is the most structurally significant variable in this cycle. As the long-standing core funding currency for global carry trades, once the yen’s low-cost assumption is broken, it will trigger not just localized capital flows but a systemic contraction of risk asset exposure worldwide. Historical experience shows such adjustments tend to be phased and recurrent, with impacts not fully realized in a single day but through ongoing volatility and deleveraging. Crypto assets, with their high liquidity and beta, are often the first to reflect pressure but do not necessarily negate long-term fundamentals.

For investors, the key challenge is not predicting the direction but recognizing the environment’s changing nature. When policy uncertainty and liquidity contraction coexist, risk management becomes more important than trend forecasting. The most valuable signals often emerge after macro variables settle and arbitrage funds complete phased adjustments.

For crypto markets, this is more a period of risk recalibration and expectation rebuilding than the end of a trend. The medium-term direction will depend on the actual recovery of global liquidity after the holidays and whether major central banks’ policies diverge further.