Capital flows from financial institutions are pouring into the crypto market at a record pace. However, cracks are also beginning to appear.
Experts warn that the traditional financial system may struggle to keep up with the continuous 24/7 volatility of the crypto space. This could lead to a liquidity crisis if the market turns down.
At the same time, expectations that the Fed will cut rates soon are supporting the upward trend. However, when discussions on social media reach extreme levels, some reports view this as a warning signal for a local peak.
Liquidity risks are growing.
In this cycle, institutional investors are taking the lead. However, their traditional risk management models are not suited to the constantly changing pace of the crypto market.
Custodia Bank CEO, Caitlin Long, noted that in traditional finance, institutions always have protective measures like a discount window or a fault tolerance mechanism. But in crypto, these mechanisms do not exist at all.
On Friday, Long spoke with CNBC at the Wyoming Blockchain Symposium:
"In the old financial system, delays were accepted because technology did not operate in real-time. But with crypto, everything happens instantly – it’s a completely 'different point'.”
The crypto market is characterized by: instantaneous payments, continuous volatility, and no room for error. Long warns that the next bear market could expose 'misalignment,' making highly leveraged institutions struggle to adapt.
If this scenario occurs, the ripple effect could spread to the traditional financial market.
Is the rumor of the Fed cutting interest rates harmful to cryptocurrency?
Alongside risks from institutional investors, macroeconomic factors are also creating additional concerns.
Expectations that the Fed may cut interest rates in September have triggered a new growth wave in the crypto market, especially after Chairman Jerome Powell's 'dovish' comments at Jackson Hole.
However, data from Santiment shows that discussions about the keywords "interest rate cut" or "Powell" on social media have surged to their highest level in nearly a year – typically a sign that the excitement has become too hot, easily leading to a short-term peak.
Typically, when an optimistic story prevails, the market often peaks shortly thereafter.
While many traders believe that loose monetary policy will 'fuel' crypto, excessive excitement can sometimes be the catalyst for a corrective phase.
An interest rate cut does not mean that crypto will immediately explode.
Not all experts believe that a Fed rate cut will immediately lead to a crypto market explosion.
Markus Thielen, Head of Research at 10x Research, believes that expectations for a rapid growth phase are too early. While he still sees long-term potential with Bitcoin (BTC), concerns about recession risks could suppress prices in the short term.
Meanwhile, network economist Timothy Peterson emphasizes that if the Fed delays cutting rates this year, the negative impact on crypto will be greater.
Currently, the probability of the Fed cutting interest rates is estimated at 75% by CME Group.
However, investors are advised not to get their hopes up too high. Even if the Fed cuts rates, the positive impact on the crypto market may need more time to truly materialize.
