The impact of the Federal Reserve's rate cut expectations on the cryptocurrency market can be explored from three dimensions: macroeconomic transmission, market capital flow, and asset pricing logic. Combined with the current policy environment and market dynamics, its core implications include the following aspects:
I. Reconstruction of the Underlying Logic of Monetary Policy Shift
1. Opening of the Valve for Liquidity Expansion
The essence of the Federal Reserve's rate cut is to inject liquidity into the market by lowering the benchmark interest rate (currently 4.25%-4.5%). This process will result in:
Increase in Excess Reserves in the Banking System: According to the Federal Reserve's June monetary policy report, as of June 2025, excess reserves of U.S. commercial banks will reach $3.2 trillion, and interest rate cuts will further activate the risk appetite of these funds.
Decrease in Credit Costs: The benchmark costs for corporate bond issuance and mortgage rates have declined, which may prompt institutions to shift funds originally allocated for fixed-income investments to risk assets like cryptocurrencies. For example, BlackRock's Ethereum ETF (IBIT) saw an inflow of $640 million on August 23, directly pushing ETH to break the historic high of $4,880.
2. Marginal Weakening of U.S. Dollar Pricing Power
Rate cuts are usually accompanied by downward pressure on the dollar. The current dollar index has fallen from 98.7 on August 22 to 97.6, while the alternative attributes of cryptocurrencies as 'digital gold' are highlighted:
Dilution of Fiat Currency Purchasing Power: The depreciation of the dollar directly increases the valuation of cryptocurrencies priced in dollars. For example, Bitcoin rose from $4,000 to $20,000 by the end of 2020 after the rate cuts, an increase of 400%.
Hedging the Sovereign Currency Trust Crisis: Although the Trump administration's tariff policies did not significantly raise inflation, they may raise market concerns about the stability of the fiat currency system. During the tariff escalation in March 2025, Bitcoin fell from $109,000 to $78,000, demonstrating the volatility characteristics of cryptocurrency as a 'digital safe-haven asset.'
II. Structural Transformation of the Cryptocurrency Market
1. Accelerated Pathway for Institutional Entry
Expectations of rate cuts reinforce institutional layouts through two paths:
Inflow of Compliant Funds: The total assets under management of Ethereum spot ETFs have surpassed $12.12 billion, and the total value held by corporations has reached $31 billion, reflecting a trend of institutions allocating cryptocurrencies through compliant channels. The daily inflow of ETFs from asset management giants like BlackRock and Fidelity has repeatedly broken records, forming a positive cycle of 'interest rate cut expectations → ETF subscriptions → price increase.'
Amplification of Staking Economic Returns: The annualized staking yield of public chains like Solana is 7-8%, significantly higher than Ethereum's 3-5%, attracting institutions to convert holdings into staking assets for compound returns. This 'holding + staking' model reduces circulation while enhancing long-term holding motivation through reinvested returns.
2. Paradigm Shift in Asset Pricing Logic
The valuation model of cryptocurrency is shifting from 'pure speculation' to 'cash flow discounting':
Tokenization of Real World Assets (RWA): The Federal Reserve's rate cuts lower corporate financing costs, promoting the on-chain presence of traditional assets like real estate and bonds. For example, Aave V3 Polygon's integration of U.S. Treasury bonds through the RWA module has seen the price fluctuation of its token AAVE correlate with the Federal Reserve's policy rate, rising to 0.68.
Rebalancing of Hash Power Costs: Rate cuts lower the borrowing costs for mining companies, with Bitcoin mining difficulty decreasing by 4.2% month-on-month in August 2025, and the proportion of electricity costs in mining operations dropping from 35% to 28%, indirectly enhancing miners' willingness to hold coins.
III. The Multidimensional Interweaving of Market Risks
1. Expectations Overdraft and Sentiment Games
The current market has partially priced in rate cut expectations, and caution is needed regarding the risk of 'buying expectations, selling facts':
Technical Overbought Signals: The RSI indicator for ETH broke above the 70 overbought region on August 23, with on-chain data showing that 30% of addresses are in profit, which may exacerbate short-term profit-taking pressure.
Volatility Amplification Effect: Derive data shows that the implied volatility (IV) of 1-month ETH call options has risen to 65%, while the IV for put options is at 58%, reflecting the market's optimistic expectation for short-term volatility. However, on August 23, the total liquidation amount across the network reached $694 million, indicating the fragility of leveraged funds.
2. The Sword of Damocles of Policy Uncertainty
The Federal Reserve's path of rate cuts is constrained by multiple variables:
Balancing Inflation and Employment: The core PCE price index rose 2.9% year-on-year in July. If inflation rebounds subsequently, it may weaken the intensity of rate cuts. For example, during the tariff escalation in April 2025, Bitcoin plummeted 28% due to concerns about imported inflation.
Long-term Impact of Leadership Changes: Powell's term will end in May 2026, and Trump may nominate a more dovish successor. If the new chair signals easing ahead of time, it may trigger a second pricing of 'greater-than-expected rate cuts' in the market.
IV. Dynamic Adjustment of Investor Strategies
1. Three-tiered Structure of Position Management
Core Position (60%): Holding mainstream assets like Bitcoin and Ethereum, utilizing the long-term support from ETF fund inflows and institutional holdings, with target prices of ETH $5,000-$5,500 and BTC $120,000-$130,000.
Satellite Position (30%): Allocating eco-tokens like Solana and Polygon to capture the Layer 2 expansion and RWA narrative dividends, with a stop-loss set 15% below the cost price.
Hedging Position (10%): Purchasing gold ETFs (such as GLD) or short-term U.S. Treasury bonds to hedge against the Federal Reserve's interest rate cuts falling short of expectations or geopolitical risks.
2. Key Nodes Driven by Events
September FOMC Meeting: If the Federal Reserve announces a 50 basis point rate cut, it may trigger ETH to break $5,000; if only a 25 basis point cut is made, caution is needed for a pullback to $4,300 (50-day moving average).
October CPI Data: If the core CPI year-on-year growth falls below 2.5%, it may strengthen expectations for three rate cuts this year, pushing BTC to challenge $130,000.
3. Real-time Monitoring of On-chain Indicators
Net Outflow from Exchanges: The net outflow of ETH from exchanges has been negative for 12 consecutive weeks, indicating long-term holders are hoarding. If the daily net inflow exceeds 100,000 coins, it may signal increased short-term selling pressure.
Changes in Miners' Holdings: The number of Bitcoin miners' holdings decreased by 32,000 coins in August, marking the largest monthly decline since 2024, necessitating caution regarding price volatility triggered by miner sell-offs.
V. Historical Reflection and Future Outlook
1. Revalidation of Cyclical Patterns
The Market Lagging Effect After Rate Cuts: After the Federal Reserve cut rates in 2019, Bitcoin only initiated a major rally six months later, increasing by 250%. The current market may replay the script of 'policy landing → sentiment pullback → capital re-entry.'
The Inner Logic of Asset Rotation: During the 2020 rate cut cycle, Bitcoin's dominance fell from 70% to 50%, with Ethereum and DeFi tokens showing significant catch-up. The current ETH/BTC exchange rate is 0.0395, at a low since 2024, which may present arbitrage opportunities.
2. Overlay of Technological Innovation Variables
The Large-scale Application of ZK-Rollup: After the upgrade of the Polygon zkEVM mainnet, transaction throughput increased to 2000 TPS, and transaction fees dropped below $0.01, potentially attracting more traditional financial institutions.
The Integration of AI and Blockchain: Tom Lee compares Ethereum to 'Wall Street after the dollar decoupled in 1971,' believing its smart contracts have irreplaceable value in verifying the identity of AI robots and the source of instructions, potentially giving rise to new narrative paradigms.
Conclusion: Finding a balance between certainty and uncertainty
Expectations of the Federal Reserve's rate cut are reshaping the underlying logic of the cryptocurrency market, which can be summarized as: liquidity expansion drives institutional entry, policy shifts lead to asset revaluation, and technological innovation opens up growth space, but expectations overdraft and policy games constitute potential risks. Investors should adopt a 'core + satellite' position structure, focusing on the September FOMC meeting and October CPI data, while dynamically adjusting positions using on-chain indicators. At critical points where ETH breaks $4,880 and BTC approaches $120,000, caution is needed for overheated market sentiment, reserving ammunition for the dual catalytic cycle of 'rate cut landing + Cancun upgrade' in the fourth quarter.
