The Fed cut interest rates by 25bp… Why did Bitcoin prices fall 4%?

The Federal Reserve lowered the interest rate by 25bp on December 18, setting the policy rate at 4.25%-4.50%. While an interest rate cut is typically positive for cryptocurrencies, the market did not welcome this cut as good news. Over the past 24 hours, cryptocurrencies have declined by 4%. This reflects concerns about the outlook for higher inflation in 2025 and plans for two more rate cuts next year. The Fed's updated outlook presents a mixed outlook for digital assets. Low interest rates mean an accommodative monetary policy, but rising inflation and a slow pace of rate cuts weaken the optimism. Investors had expected a faster rate cut cycle by 2025, which could have buoyed risky assets like cryptocurrencies. Last week, the US November Consumer Price Index (CPI) data showed a 2.7% year-over-year increase, briefly lifting market sentiment. Bitcoin reached a new all-time high of $108,000 at the start of the week, as the inflation figure matched expectations. However, the enthusiasm seems to have faded as macro uncertainty takes center stage. As the year-end season approaches, the immediate impact remains neutral to bearish. The market is absorbing the Fed's cautious stance. Short-term trading may see increased volatility during the thin liquidity of Christmas. Despite high inflation and interest rates, the cryptocurrency market has surged throughout the year, ultimately relying on regulation and institutional adoption. The Bitcoin ETF has recently surpassed the total AUM of the gold ETF. Additionally, there is a possibility of more cryptocurrency ETFs being approved next year. The potential of Bitcoin reserves and Trump's favorable regulation could also offset the impact of inflation and limited rate cuts. The weak dollar due to low interest rates may provide some support for Bitcoin and other cryptocurrencies as an alternative asset. However, the expected inflationary pressures could weigh on investor sentiment. In Q1 2025, the cryptocurrency market is likely to react to additional economic indicators and central bank policies. The sustained momentum of Bitcoin prices will depend on how the Fed adjusts its approach if inflation expectations rise further. Until then, the market remains in a waiting mode, with a muted reaction to what was expected to be a positive interest rate cut.