Key Insights:
Crypto markets see heavy corrections; Bitcoin slides 2%, and altcoins crash.
US Fed Cuts Interest Rates by 0.25% but expects only two rate cuts in 2025.
Chainlink sees a major 10% crash amid altcoin rout.
ETF markets see a slowdown in inflows.
Market sentiment drops to 69 today from 80 yesterday.
In its last meeting of 2024, the United States Federal Reserve cut interest rates by 0.25%, which should have sent the markets rallying. However, contrary to expectations, the crypto markets took a hit, and there were severe corrections in almost all top cryptocurrencies.
With this decision, the interest rate window is now 4.25% to 4.5%. Historically, these are the highest interest rates in the US economy in around 17 years.
Bitcoin fell by 2%, Ethereum by 4.6%, XRP by 5.7%, BNB by 1%, Solana by 3.8% and DOGE by 6%. The corrections were unexpected and took place in a snap after the results of the Fed meeting was published.
The largest to lose among major altcoins were XRP(-6.75%), DOGE(-6.5%), AVAX(-9.8%) and LINK (-11%).
Deep Corrections in Top 10 Cryptocurrencies
CoinMarketCap
A similar crash also took place in stock markets as well with the Nasdaq 100 index seeing a 3.6% fall in its 18 Dec trading session. Just like the crypto markets, the US Stock markets too rely on greater liquidity released from the government (via US Fed interest rates) to sustain growth.
According to Ali Martinez, the crypto markets fell because of the expectation of lower number of rate cuts in 2025. Fed's guidance indicates that in 2025, the rate cuts could be limited to 2.
This estimate is due to the assumption of higher inflation of 2.5% throughout the year. At present, the inflation in the US economy is at 2.7%, higher than the US Fed's target of keeping it at a maximum of 2%. Interest rate cuts could prop up inflation above 3%, making it difficult for the consumers in the country.
These inflation targets have forced the US Fed to keep interest rates at current levels of 4.25% to 4.5%. Also, it will be difficult to squeeze two 0.5% rate cuts in 2025 due to higher inflation. As a result, after the estimated 2 rate cuts, interest rates could drop down to 3.75% as opposed to earlier estimates of 3%.
In what appears to be a normal video, BlackRock explains how Bitcoin works to people new to crypto. BlacRock's disclaimer that Bitcoin's 21 million hard caps on token supply might not be permanent and could be changed, scared several crypto enthusiasts.
Technically, the Bitcoin that we see today is not the exact Bitcoin that was invented by Satoshi Nakamoto. Over the years, several Bitcoin hard forks and soft forks have changed some characteristics to improve it. If another major hardfork takes place, making Bitcoin's supply flexible, it could result in a serious wealth collapse in the crypto markets.
Bitcoin ETFs have cooled down after seeing consistent inflows of $500 million and higher in the last three weeks. The latest Bitcoin inflows have shrunk to a new value of $272 million following the US Fed's decision.
Etheruem ETFs have seen their inflows almost dry up with just $2.5 million yesterday. Next week, ETH may see zero to negative inflows based on current estimates.
According to crypto chart analyst Ali Martinez, the US Fed's decision to have only two rate cuts in 2024 did not resonate well with the markets, which were expecting a 100 basis point cut, i.e., 1%. The ability to squeeze two 0.5% cuts in 2025 seems impossible due to the inflation outlook by the Fed.
The prevalent interest rates in the US at present was around 2.7% for the month of November 2024. This is 0.7% higher than the Fed's target of 2%. Further, looking at the new projection of inflation in the US, we get that throughout 2025 inflation could remain around 2.5%. Further, the first dip in the inflation is expected around Jan 2026 when it may drop to 2.1%, still higher than the Fed's mandated target of less than 2%.
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