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In summary
- The crypto ecosystem fell after the Fed’s restrictive turn and projections of smaller rate cuts in 2025.
- Analysts consider the fall a temporary setback and see signs of consolidation before new advances.
- Trump’s proposals and a favorable regulatory environment could benefit risk assets like Bitcoin.
The crypto ecosystem and stocks in general fell sharply on Wednesday, as traders tried to predict the outlook for next year following the US Federal Reserve’s restrictive turn.
While the 25 basis point reduction announced by the Federal Reserve on Wednesday was largely priced in, concerns increased when the bank signaled that interest rates may not fall again soon.
During a news conference, Fed Chair Jerome Powell told reporters that while inflation was retreating “steadily,” the latest high readings indicated it had been “slower than expected.”
The Fed’s updated “dot plot” for 2025 has signaled a shift in policy expectations, with officials now projecting two rate cuts — equivalent to 50 basis points — over the next 12 months, down from three cuts outlined in the previous forecast.
“Inflation has progressed toward the Committee’s 2% target, but remains somewhat elevated,” the Fed said in a statement.
Bitcoin fell 5% to just over $100,000 after Powell’s comments, while the Nasdaq slid 3.6%, the Dow fell 2.6% and the S&P 500 fell nearly 3%.
Risk assets, including cryptocurrencies and stocks, have soared this year thanks in part to an economy stabilizing as the central bank struggles to control inflation.
What does all this mean for cryptocurrencies?
According to Ryan McMillin, chief investment officer at crypto fund manager Merkle Tree Capital, traders should expect and be comfortable with 20% corrections during a bull market.
“I see no reason to think this bull market has run its course,” McMillin told Decrypt. “This looks more like a dip worth buying.”
The market has been trending up and consolidating around elevated levels over the past week, signaling a healthy acceptance of the new price range while stabilizing ahead of a possible further advance, he added.
“This is a short-term pullback as the FOMC meeting was more restrictive than expected,” Pratik Kala, head of research at Apollo Crypto, told Decrypt. “Expect higher levels next week, same time from today.”
Other analysts support that view.
“I understand the tightening reaction. I don’t buy the narrative that this is the Fed’s dot plot ending the bull market,” Pav Hundal, principal analyst at Swyftx, told Decrypt.
President-elect Donald Trump’s proposed tariffs to boost domestic industrial production could generate near-term market volatility next year and stoke inflationary pressures, economists say.
But according to Hundal, those policy discussions are unlikely to mean much in terms of the Fed’s decision to cut rates further or keep them steady.
“It doesn’t even matter if all the talk about tariffs is just talk; it’s a clear sign that Trump will do whatever it takes to stimulate economic growth, and that’s good for risk assets,” he said.
This comes as several tailwinds continue to converge ahead of Trump’s inauguration on January 20.
During the campaign, Trump promised to protect Cryptocurrency Mining interests, establish a Bitcoin reserve, and make the US the “crypto capital” of the world.
He also proposed formulating specific cryptocurrency policies that would provide what many in the industry have long been asking for.
“There is too much behind this trade, in our opinion, right now,” Jonathan de Wet, chief investment officer at crypto investment firm Zerocap, told Decrypt.
He pointed to a “favorable U.S. regulatory environment,” a strong U.S. economy and MicroStrategy’s entry into the Nasdaq 100 last week, which virtually “opens the door to passive capital” to allocate through index-traded funds.
Editor’s Note: Added additional comments from analysts
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