I. Interpretation of the Federal Reserve's Interest Rate Meeting: Policy Stabilization, Market Expectations Adjustment
At the latest interest rate meeting, the Federal Reserve decided to maintain the federal funds rate target range at 4.25% -4.50%, which was in line with market expectations. However, the policy language, economic forecasts, and guidance on future interest rate paths have had a profound impact on the market. This meeting not only reveals the Federal Reserve's latest assessment of the current economic environment, but also affects the market's expectations for future liquidity conditions, thereby directly affecting the global asset market, including cryptocurrencies. Below, we will provide a detailed interpretation from two aspects: the core content of the Federal Reserve's decision and its direct impact on the market.
1.1. Core Content of the Federal Reserve's Decision: Maintain Steady Policy, but Release Easing Signals
The Federal Reserve decided to keep the benchmark interest rate unchanged at this meeting, and in the post-meeting statement, emphasized that "the policy stance remains restrictive to ensure that inflation returns to the 2% target". This statement indicates that the Federal Reserve still believes that the current inflation level is not sufficient to support an immediate rate cut, but compared to the previous few meetings, the language of this decision has softened. For example, in previous meeting statements, the Federal Reserve had repeatedly emphasized the "need for a restrictive policy for a longer period", but in this meeting, this statement was weakened, and instead emphasized that future decisions will be adjusted based on economic data. This change has been interpreted by the market as the Federal Reserve preparing for a future policy shift.
In addition, in the latest economic forecast, the Federal Reserve slightly lowered its GDP growth forecast and raised its inflation forecast for the next few years, indicating that policymakers are weighing the contradictions between economic slowdown and inflation persistence. For example, the Federal Reserve expects the US GDP growth rate in 2025 to be lowered from the previous forecast of 2.1% to 1.8%, while the core PCE (the Federal Reserve's preferred inflation indicator) in 2025 is raised from 2.2% to 2.4%. This forecast adjustment reflects the Federal Reserve's cautious attitude towards the future economic situation, that is, although economic growth is slowing, inflation still has certain persistence, so it will not rashly cut interest rates in the short term.
Another key point worth noting is the Federal Reserve's balance sheet policy. Since launching the balance sheet reduction in June 2022, the Federal Reserve has reduced up to $60 billion in Treasuries and $35 billion in MBS (mortgage-backed securities) per month. At this meeting, the Federal Reserve announced that the balance sheet reduction pace will be reduced from $60 billion to $50 billion, and this adjustment, although small in magnitude, signals that the liquidity tightening cycle is about to slow down. The Federal Reserve's balance sheet reduction is an important factor affecting market liquidity, as it directly determines the US dollar supply in the market. Over the past two years, due to the Federal Reserve's tightening policy, a large amount of liquidity has been withdrawn from the market, leading to pressure on the stock market and the cryptocurrency market. The slowdown in the balance sheet reduction pace means that the Federal Reserve may be preparing for future liquidity easing.
The Dot Plot is one of the important tools for the market to interpret the Federal Reserve's policy direction. At this meeting, the Dot Plot shows that the median interest rate expectation of FOMC members for 2025 is 3.75%, implying at least two rate cuts. Although this expectation is basically consistent with the market's previous expectations, there are still differences in the details. Some officials expect rate cuts to start as early as the fourth quarter of 2024, while others believe rate cuts will not occur until mid-2025. This divergence indicates that there are still different views within the Federal Reserve on the persistence of inflation, and this will also lead to greater uncertainty in the future policy path.
Overall, while the Federal Reserve's decision at this meeting maintained the interest rate unchanged, it released a series of easing signals: softened language, slowed balance sheet reduction, lowered economic growth forecasts, and the Dot Plot showing a rate cut path. These factors combined have caused the market to re-evaluate the future monetary policy environment, directly affecting the performance of asset prices.
1.2. The Direct Impact of Federal Reserve Policy on the Market: The Liquidity Turning Point is Approaching, Risk Assets Welcome a Turnaround
The Federal Reserve's policy adjustments can be analyzed from multiple dimensions, especially the US dollar index (DXY), US bond yields, the stock market, and the cryptocurrency market. After the announcement of this decision, the market's immediate reaction shows that investors' expectations for liquidity improvement are strengthening, which also suggests that high-risk assets such as Bitcoin may usher in a rebound cycle.
First, the US dollar index (DXY) has fallen sharply. The US dollar index is an important indicator for measuring global capital flows. After the Federal Reserve hinted at the possibility of slowing the pace of tightening in the future, the US dollar index quickly fell, recording the largest single-day decline since 2023. A weaker US dollar usually means that global capital is more willing to flow into high-yield assets, which provides support for assets such as US stocks, gold, and Bitcoin. Over the past two years, due to the Federal Reserve's continued rate hikes, the US dollar index has remained strong, leading to capital outflows from emerging markets and pressure on risk assets. Now, with the change in the Federal Reserve's policy tone, the market is beginning to expect that the US dollar's strong cycle may be about to end, which will be beneficial for more capital inflows into assets like Bitcoin.
Secondly, US bond yields have declined, and interest rate expectations have reached a turning point. Changes in US bond yields are often seen as the market's judgment on the future interest rate environment. After the Federal Reserve meeting, the 10-year US bond yield fell from 4.3% to 4.1%, indicating that the market is already pricing in the possibility of future rate cuts. For the stock and cryptocurrency markets, lower US bond yields mean lower financing costs, thereby enhancing the attractiveness of risk assets. Historical data shows that when US bond yields decline, Bitcoin often performs relatively strongly, as this indicates that the market's liquidity environment is improving.
In the US stock market, especially technology stocks and growth stocks, there has been a strong rebound. The Federal Reserve's policy adjustments have had a particularly obvious impact on technology stocks, as these companies often rely on relatively low financing costs, and the rise in rate cut expectations has caused investors to flock back to these stocks. The Nasdaq index rose by more than 2% after the interest rate meeting, and the stock prices of growth companies such as Tesla and Apple have also rebounded. This trend is a positive signal for the cryptocurrency market, as in recent years, technology stocks and Bitcoin have shown increasing correlation, and their capital flows have become more closely linked.
The cryptocurrency market has also responded quickly. Bitcoin price has risen by more than 5% after the Federal Reserve's decision was announced, breaking through the key resistance level of $85,000. Mainstream cryptocurrencies such as Ethereum have also risen in tandem, reflecting the market's strengthening expectations for liquidity easing. If the Federal Reserve continues to release more easing signals in the coming months, Bitcoin may usher in a new round of upward momentum, and may even break through its previous highs.
In summary, although the Federal Reserve's policy decision this time did not immediately adjust interest rates, the signals it released have had a far-reaching impact on the market. The weakening of the US dollar, the decline in US bond yields, the rise of technology stocks, and the rebound of Bitcoin all indicate that the market is gradually adjusting its expectations for liquidity. For investors, this means that the liquidity turning point may have already arrived, and high-risk assets such as Bitcoin may welcome a new round of upward cycle.
II. Macroeconomic Background: The Liquidity Turning Point Has Arrived, Capital May Flow Back to Risk Assets
Over the past two years, the global financial market has experienced an unprecedented round of liquidity tightening. The Federal Reserve launched its rate hike cycle in March 2022 and implemented large-scale balance sheet reduction (QT) at the same time, causing a dramatic change in the global market's funding environment. This policy has led to a decline in US dollar liquidity and a rise in the cost of capital, resulting in a sharp correction in the prices of risk assets. As a high-risk and highly elastic asset class, Bitcoin has experienced violent market fluctuations in this process. However, with the Federal Reserve slowing the pace of balance sheet reduction in 2024, the flow of market capital is undergoing subtle changes, and the liquidity turning point may have quietly arrived.
2.1. Analysis of the recent liquidity environment: the turning point of market funds has appeared, and a large amount of off-exchange funds are waiting to enter the market
Against the backdrop of collective tightening by central banks around the world in 2022-2023, market funds tend to be conservative, and the valuation of risk assets has been severely suppressed. However, several data indicators since 2024 show that the liquidity environment is changing. The Coinbase research team's recent analysis believes that Bitcoin may bottom out and rebound in the next few weeks, based on the following main reasons:
First, the pace of global liquidity tightening is slowing down. Over the past two years, due to the interest rate hikes by the Federal Reserve, the European Central Bank and other major central banks, the global financial market has experienced a serious capital outflow and deleveraging, leading to pressure on both the stock market and the cryptocurrency market. However, at the March monetary policy meeting in 2024, the Federal Reserve clearly stated that the pace of balance sheet reduction will slow down, and the dot plot shows that there may be 2-3 rate cuts within the next 12 months. This means that the tightening of restrictive monetary policy over the past two years is weakening, and market liquidity is likely to improve.
Secondly, the correlation between the US stock market and the cryptocurrency market has strengthened, and the cryptocurrency market is more sensitive to changes in macro liquidity. The 90-day rolling correlation between Bitcoin and the US stock market (especially the Nasdaq index) reached a high of 0.75 in 2024, indicating a significant increase in their correlation. In other words, the performance of technology stocks is having an increasingly greater impact on Bitcoin, and technology stocks are highly sensitive to interest rates. As the market adjusts to the future policy of the Federal Reserve, technology stocks have already started to rebound, and this trend is likely to drive the price of Bitcoin and other cryptocurrencies to warm up.
In addition, the rise in investor risk aversion has led to a reduction in institutional allocation to cryptocurrencies, but the market structure remains healthy. In the second half of 2023, due to the rapid rise in US bond yields, most institutional investors reduced their allocation to cryptocurrencies due to expectations of prolonged high interest rates. Hedge funds and traditional institutions have shifted funds to low-risk assets such as short-term US Treasuries and money market funds, leading to a decline in Bitcoin market liquidity and trading volume. However, it is worth noting that there is no systemic risk in the market, and the structure of the cryptocurrency market remains relatively healthy, with steady inflows of funds into BTC spot ETFs, indicating that institutions are still looking for the right time to enter the market.
The most critical point is that the total balance of the stablecoin market has grown to $229 billion, indicating that off-exchange funds are accumulating and waiting to enter the market. Historical data shows that the supply of stablecoins is closely related to the capital flow in the cryptocurrency market. When the total market value of stablecoins increases, it often means that new incremental funds are about to enter the cryptocurrency market. Currently, the total balance of USDT (Tether) and USDC has continued to grow since the end of 2023, indicating that a large amount of funds are waiting on the sidelines, and once the market trend is determined, these funds may quickly flow back into Bitcoin and other cryptocurrencies.
In summary, although the cryptocurrency market is still affected by macroeconomic uncertainties, the pressure of global liquidity tightening is weakening, and there is still a large amount of funds waiting to enter the market. If the Federal Reserve continues to release dovish signals in the coming months and global liquidity improves, the cryptocurrency market is expected to usher in a new round of rebound.
2.2. The relationship between US dollar liquidity and the cryptocurrency market: historical data reveals the pattern of BTC's performance
From historical data, the tightness of US dollar liquidity is highly correlated with the performance of the Bitcoin market. Specifically, in a low-interest-rate and loose monetary environment, Bitcoin often experiences a significant rise, while in a high-interest-rate and tightening policy environment, Bitcoin faces great pressure. We can divide this trend into the following three stages:
Stage 1: 2017-2021 - Loose cycle drives the BTC bull market
During 2017-2021, the Federal Reserve maintained low interest rates and QE (quantitative easing) policies, and global market liquidity was extremely abundant. During this period, institutional investors' interest in risk assets increased significantly, and Bitcoin experienced two bull markets:
In 2017, the BTC price rose from $1,000 to $20,000, an increase of more than 20 times.
In 2020-2021, the Federal Reserve adopted a zero-interest-rate policy and unlimited QE due to the pandemic, and the Bitcoin price soared from $4,000 to $69,000, setting a new historical high.
Stage 2: 2022-2023 - Tightening policy leads to a sharp drop in BTC
In 2022, the Federal Reserve aggressively raised interest rates (a total of 11 hikes, raising the rate from 0.25% to 5.5%) and simultaneously implemented large-scale balance sheet reduction, leading to a tightening of global liquidity. As a highly volatile asset, Bitcoin experienced a significant correction during this period, with an annual decline of more than 60%. Institutional investors withdrew, and market trading volume declined significantly.
Stage 3: 2024-2025 - Slowing balance sheet reduction, BTC sees a recovery
As the Federal Reserve slows the pace of balance sheet reduction in 2024, market liquidity is showing signs of improvement. Historical experience shows that when liquidity pressure eases, BTC will enter a new round of upward cycle as market funds flow back. If the Federal Reserve starts to cut interest rates or adopt a more accommodative policy before 2025, Bitcoin may experience a bull market driven by the recovery of liquidity.
Currently, the Federal Reserve is at a critical stage of policy shift. Although it has not yet entered the interest rate cut cycle, signals such as slowing balance sheet reduction, the decline in the US dollar index, and the growth of stablecoin balances all indicate that the liquidity turning point has emerged. If the Federal Reserve continues to release dovish signals in the coming months, the cryptocurrency market is expected to attract more capital inflows, and Bitcoin, as a liquidity barometer among risk assets, will be the first to benefit and experience a new round of upward trend.
III. Outlook for the Bitcoin Market: Possibilities and Risk Factors of a Bottom Rebound
The recent price fluctuations in the Bitcoin market, the flow of institutional funds, and the macroeconomic environment all to some extent indicate that the market may be in the process of bottoming out and is expected to rebound as liquidity improves. However, investors still need to be aware of the uncertain factors in the market, including the direction of the Federal Reserve's policy, geopolitical risks, and potential risks within the cryptocurrency market.
3.1. Short-term price trend analysis of Bitcoin: strengthening bottom signals, technical indicators show rebound potential
From a technical analysis perspective, the recent market performance of Bitcoin has shown signs of strengthening bottom support, and multiple technical indicators suggest that the market may be approaching a turning point.
First, the key support level of $76,000 - $80,000 has formed a market bottom.
Over the past few weeks, the Bitcoin price has tested the $76,000 - $80,000 range multiple times but has not effectively broken through, indicating that this area has strong buying support. From historical data, this range is also the cost area for a large amount of BTC spot ETF capital inflows, and the involvement of institutional funds has strengthened the support strength. In addition, on-chain data analysis shows that there is a large accumulation of UTXO (unspent transaction output) by long-term holders in this range, indicating that holders' confidence is strong and there has been no large-scale panic selling.
Secondly, the RSI (Relative Strength Index) has rebounded, and the market momentum has been repaired.
The RSI indicator is commonly used to assess the overbought or oversold conditions of the market. When the RSI falls below 30, the market enters an oversold state, indicating a potential bottom rebound. Recently, the Bitcoin RSI indicator has rebounded from around 30 to the 45-50 range, indicating that the market momentum is recovering and the bullish force is gradually strengthening. In addition, the rebound in RSI is usually accompanied by price stabilization, indicating that buying pressure in the market is increasing.
Third, trading volume has gradually increased, and market liquidity has improved. During the bottoming process, the change in trading volume is crucial. Recently, the trading volume of Bitcoin has increased in the key support area, indicating that market buyers are entering the market, rather than just selling behavior. In the past few weeks of low-level volatility, the trading volume of Bitcoin has gradually increased, suggesting that there are signs of capital inflows. Once the market sentiment turns optimistic, incremental funds may accelerate the breakout of Bitcoin from the consolidation range.
In general, if the Federal Reserve maintains its current monetary policy and market liquidity continues to improve, Bitcoin may maintain a volatile bottom-building structure in the short term and see a rebound in the second quarter.
3.2. Market Trends of Institutional Investors: Capital Inflows Strengthen Market Support
The trends of institutional investors play a crucial role in the medium and long-term trends of the Bitcoin market. In recent years, with the launch of Bitcoin spot ETFs, more and more traditional financial institutions have participated in the Bitcoin market, and their capital flows have become an important barometer of market sentiment.
First, the Grayscale BTC holdings have remained stable and there has been no large-scale sell-off. As one of the world's largest Bitcoin trust funds, Grayscale's BTC holdings are seen as an important indicator of the market. In the first quarter of 2024, Grayscale's BTC holdings remained stable and there was no large-scale capital outflow, indicating that institutional investors have not panicked and sold off due to short-term market volatility. In contrast, in the past few years, during extreme market volatility, capital outflows from the Grayscale fund often exacerbated the decline in Bitcoin prices, but in this round of adjustment, the stability of Grayscale's holdings has increased, indicating that institutional investors still have a positive outlook on the long-term value of BTC.
Secondly, the capital flows of Bitcoin spot ETFs show that institutions are increasing their BTC holdings. Bitcoin spot ETFs are one of the most important channels for capital inflows into the market in 2024. Institutional investors are still buying the dips. This is in stark contrast to the large-scale capital outflows during the Federal Reserve's tightening cycle in 2022-2023. The continuous inflow of ETF capital not only provides market buying support, but also enhances the market's confidence in the long-term trend of BTC.
Thirdly, MicroStrategy continues to increase its BTC holdings, indicating that institutions remain confident in the long-term value. As one of the world's largest corporate BTC holders, MicroStrategy has recently increased its BTC holdings again, with a total holding of over 214,000 BTC. This indicates that although the market is experiencing significant short-term volatility, some institutional investors are still willing to hold BTC in the long term and see it as an important asset allocation tool. MicroStrategy's increase not only boosts market confidence, but also sends a signal to other institutions about the long-term investment value of BTC.
Overall, the continuous inflow of institutional capital provides strong medium and long-term support for BTC prices and enhances the market's rebound momentum.
3.3. Potential Market Risks: Uncertainties Remain, Need to Beware of Sudden Shocks
Although the market is showing signs of a bottom rebound, there are still multiple risk factors that may affect the short-term trend of Bitcoin.
First, the uncertainty of Federal Reserve policy. Although the market generally expects the Federal Reserve to cut interest rates in the second half of 2024, if inflation data rebounds, the Federal Reserve may delay rate cuts or even further tighten liquidity. For example, if future CPI (Consumer Price Index) data rises more than expected, the Federal Reserve may return to a hawkish stance, leading to a deterioration of market sentiment and pressure on risk assets. In this case, Bitcoin may face further adjustment pressure.
Second, global geopolitical risks may affect investor risk appetite. In recent years, geopolitical events have had an increasing impact on the financial markets. For example, the Russia-Ukraine conflict, tensions in the Middle East, and instability factors in the Asia-Pacific region may all affect the risk appetite of global investors. If market risk aversion rises, capital may flow into traditional safe-haven assets such as US Treasuries and gold, while high-risk assets like Bitcoin may face short-term selling pressure.
Third, liquidity risks within the crypto market. In addition to macroeconomic factors, there may also be potential risks within the crypto market. For example, if some exchanges experience liquidity problems or liquidation risks, it may trigger short-term violent fluctuations in the market. In addition, if large institutional investors sell BTC due to liquidity needs, it may also have an impact on the market. Therefore, investors still need to closely monitor on-chain data, exchange capital flows, and the leverage situation in the derivatives market to assess whether there are potential risks in the market.
Currently, the Bitcoin market is in a stage of strengthened bottom support, institutional capital inflows, and improved liquidity environment, and the market is waiting for new catalysts to drive price breakthroughs. However, investors still need to be vigilant about the uncertainty of Federal Reserve policy, geopolitical risks, and liquidity risks within the crypto market, as these factors may affect the short-term market trends.
From the overall trend, if market liquidity continues to improve and institutional capital continues to flow in, Bitcoin is expected to see a rebound in the second quarter. However, before the key resistance levels are effectively broken, the market may still maintain a volatile trend, and investors need to closely monitor the macroeconomic data, ETF capital flows, and market trading volume in the coming months to determine whether Bitcoin is entering a new upward cycle.
IV. Investment Strategies and Conclusions
In the current market environment, investors should adjust their investment strategies based on their different investment styles, risk tolerance, and understanding of the market. The Federal Reserve's continued policy stability, the gradual improvement in liquidity environment, and the rebound signals in the Bitcoin market all provide different opportunities and challenges for investors. In order to achieve better investment returns in this volatile market, investors must be flexible in their strategies and closely monitor changes in macroeconomic and market trends.
4.1. How Should Investors Respond to the Current Market?
Strategies for Short-term Traders: For short-term traders, the market volatility is relatively large, and technical analysis is particularly important. In the short-term fluctuations of Bitcoin prices, the $80,000 key support level is a very important reference point. If the Bitcoin price breaks below this area, short-term traders should consider short-term stop-loss to avoid the risk of further downside. At the same time, once the market shows signs of stabilization, short-term traders can wait for Bitcoin prices to break through the $88,000 area and get confirmation, and then increase their positions to provide profit opportunities for the subsequent price increase.
However, short-term trading has higher risks, especially in the current situation where crypto market liquidity is not fully stable, so traders should strictly set stop-loss points to avoid over-exposure. Technical signals in the market, especially when prices break through key resistance levels, can help short-term investors grasp the short-term price trend. In addition, short-term traders should closely monitor the release of macroeconomic events such as US non-farm data, CPI, and Federal Reserve policy meetings, as these factors can have a significant impact on market volatility.
Strategies for Medium and Long-term Investors: For medium and long-term investors, the current market still has significant upside potential, especially as the liquidity environment gradually improves. Compared to short-term traders, medium and long-term investors can be more patient in waiting for the right time for the market to rebound. The current Bitcoin price may be in a relatively bottom area, and the market's liquidity turning point has already arrived. Medium and long-term investors can build positions in batches during price pullbacks, especially around key support areas (such as the $88,000-$83,000 range), which will lay a solid foundation for future rebound cycles.
As the Federal Reserve's balance sheet reduction slows and market liquidity gradually improves, medium and long-term investors are expected to benefit from future rebound cycles. When building positions, investors should pay attention to BTC's long-term trends and changes in market sentiment, and try to avoid the impact of short-term market sentiment volatility on investment decisions. As the Bitcoin market gradually regains confidence, medium and long-term investors will achieve relatively stable returns.
Strategies for Institutional Investors: Institutional investors usually have stronger financial resources and risk management capabilities, so their investment strategies often focus on the accumulation of long-term value and adopt relatively conservative operating methods. In the current market environment, institutional investors should closely monitor changes in Federal Reserve policy, especially potential monetary easing signals in the future. If the Federal Reserve decides to increase monetary easing or cut interest rates, this will bring more capital inflows to risk assets, including Bitcoin.
At the same time, institutional investors can consider long-term holding of Bitcoin and Ethereum to hedge against the risk of US dollar depreciation. As the two most liquid crypto assets, Bitcoin and Ethereum have gradually become a key component of institutional asset allocation, and this trend may accelerate as the crypto market matures. By holding these crypto assets, institutional investors can not only obtain substantial returns when prices rebound, but also avoid the potential risks of traditional financial assets, such as inflation and global market uncertainty.
4.2. Future Market Outlook
Looking at the overall market performance, with the gradual stabilization of the Federal Reserve's policy and the improvement of the liquidity environment, the possibility of a short-term rebound and medium-to-long-term upward trend of Bitcoin is gradually increasing. Although the market still faces the impact of risk factors, especially the uncertainty of the macroeconomic environment, geopolitical risks, and the potential liquidity issues in the crypto market, the expectation of the Federal Reserve's loose monetary policy and the continuous inflow of institutional investor funds still bring new opportunities to the Bitcoin market.
First, the prospect of improved market liquidity is clear. As the Federal Reserve slows down its balance sheet reduction, market liquidity is expected to gradually improve, especially in the short term, the loose stance of the US dollar may provide more capital inflows into risk assets. Bitcoin's historical performance shows that under the environment of ample US dollar liquidity, BTC's performance is often relatively strong. Therefore, in the context of an improving macroeconomic environment, Bitcoin is expected to rebound in the coming weeks and provide profit opportunities for investors.
Second, Bitcoin is expected to enter a new round of upward cycle. Supported by the liquidity environment, Bitcoin's price may break through the target range of $ 85,000 - $ 88,000 and usher in a new round of upward cycle. However, this process may also face technical fluctuations and consolidation, and after the price breaks through the key resistance level, the market still needs to face the repeated fluctuations of capital allocation and market sentiment.
Third, market risks still exist. Although the market is expected to improve, investors still need to pay attention to the fine-tuning of the Federal Reserve's policy and changes in the global economy. In particular, the resurgence of inflation or the escalation of international conflicts may lead the Federal Reserve to tighten monetary policy again, which will put pressure on risk assets such as Bitcoin. Therefore, investors must maintain vigilance, closely monitor the dynamic changes in the market, and adjust their investment strategies in a timely manner.
Overall, against the backdrop of the Federal Reserve's policy stabilization and the gradual improvement of the liquidity environment, the Bitcoin market has a relatively optimistic outlook, but the market volatility is still relatively large, and investors should make reasonable asset allocation based on their own risk tolerance and market trends.
