Editor: Jason

Layout: Jason

Author: Jason, Old Xu (jack)

Update Date: 2025/11/4 (Note the update time, for the short-term market part)

Old Xu Q1: What is your view on the market for the last quarter of 2025?

Jason:

Regarding the earnings reports of the seven tech sisters in the US stock market this week, I believe the correlation with the crypto market is not significant. My view has always been that in a game of existing stocks, with liquidity not being abundant, the correlation between the US stock market and crypto is not a constant value. The premise of macro liquidity is very important; for example, in the context of large QE, when both share the same narrative, the two markets will exhibit a high positive correlation, whereas in a context of liquidity shortage, the two markets are essentially draining each other.

Therefore, to pursue short-term alpha, one can look for opportunities in the technology sector, such as AI-related projects like TAO and VIRTUAL, which have already shown some right-side trends. However, for the entire crypto market, especially BTC and ETH, I believe this is still a short-term rebound within a large range and not a directional breakout.

Secondly, the most important macro event recently is undoubtedly the easing of U.S.-China trade relations. Regarding this, we don't need to go into lengthy discussions; we just need to remember one conclusion: this is only a temporary ceasefire, not a fundamental resolution. However, for the short-term market, this is definitely a good thing. It means that the upward risk of inflation has decreased, which will greatly increase market bets on a rate cut in December, and the market may have some price-in actions in advance.

Finally, the U.S. government may end the 30-day shutdown next week. This means the Treasury will start spending money again, and the water level in the TGA account will decrease, understood as a kind of liquidity release expectation.

Lao Xu Q2: What is your overall view of the crypto market in 2026?


Jason: From the ETF in 2024 to the two rounds of one-sided rises until Trump's assumption of office at the end of 2024—three significant characteristics have emerged in the market: 1. The macroization of crypto: The market's drivers have shifted from narratives within the community, such as halving and technological upgrades, to a deep binding with U.S. macro policies. If you are not watching Powell's expressions and Trump's tweets for trading, it is basically equivalent to running naked. 2. Liquidity has shown a 'head effect': Money is converging towards BTC and ETH, the two most mainstream and compliant assets. Altcoins are performing very poorly overall. 3. The 'on-chain migration' of liquidity: DEX is eating into the liquidity of CEX, which changes our traditional methods of analyzing capital flows. I will elaborate on the first characteristic. To judge the market direction for 2026, the core is to understand the fundamentals of the U.S. economy and policy games. Therefore, the first core risk we need to pay attention to in 2026 is: Will Trump 'renegotiate' some of his previous commitments to crypto? Once his attitude reverses, the driving force for upward momentum will collapse. The second point is to pay attention to the dollar interest rate decisions in 2026 and the QE expectations after the pause of QT. @Lao Xu: Why focus so much on interest rates? In the past, the impact of dollar interest rate policies on the market seemed not as significant as now. Why is that? @Jason: The market is still lacking liquidity, and interest rates are directly linked to liquidity.

Lao Xu Q3: What do you think the Federal Reserve's interest rate policy will be like in 2026?

Jason: This question can actually be discussed by breaking down the time points of interest rate changes. The interest rate analysis logic before Powell's departure is completely different from that after his departure.

As Powell's departure is around May 2026, we can discuss interest rate policy by dividing it with Q2 as the boundary. Before Q2, the influencing factors of interest rate policy are mainly inflation, recession expectations, and the final political game between Powell and Trump. I believe Powell will do his best to maintain the Fed's independence and will not leave a stain in his term. I will first state the first conclusion: I believe liquidity will be relatively tight in Q1. Why tight? Because Powell is still in office. His term ends in May, before which he has three FOMC meetings in January, March, and April. During the time before he 'gets off at his station', he will likely maintain a relatively strong stance. First, we can see clues from the dot plot. The Fed's expectation for interest rate cuts in 2026 has changed from two cuts in June to one in September. This shows that the committee has become more conservative about rate cuts. The reason for this is that core inflation remains stubborn, and while the labor market is cooling down, it has not reached a level that requires urgent rate cuts. In other words, the Fed does not see signs of recession, and there is still some distance from what the Fed considers the recession threshold. This is the attitude towards rate cuts in 2026 revealed by the dot plot. At least we can say that before Powell's departure, this attitude should be the main tone. Secondly, and more importantly, is Powell's personal political legacy. He has previously paid tribute to the late former Fed Chairman in public, and he will follow in Paul Volcker's footsteps, doing whatever it takes to curb inflation. Powell also wants to be seen as a 'strong chairman' fighting against high inflation like Volcker. He cannot leave a 'recurrent inflation' stain at the end of his term. Therefore, unless economic data deteriorates, he will definitely protect the Fed's independence against political pressure from Trump.

Lao Xu: Isn't Trump always shouting on Twitter, '1% interest is enough'? Powell will use action to tell him not to mess with the Fed.

Jason: Unless the data deteriorates, Powell will definitely not give in.

Jason: I believe Q2 will be relatively loose. Why is Q2 loose? Because the next Fed chair is likely to be a Trump supporter 😆 (What is his name again? That very eager one). With such a dovish figure coming in, starting from May, the Fed's policy stance may undergo a fundamental change. However, there is a very important variable to pay attention to, which is the 'expectation of U.S. economic recession'. So for the third point, I will add a prerequisite to the conclusion that this judgment is based on the premise that the economy will not enter recession in Q1. If the unemployment rate crosses 5.6% in Q1, the Fed may have to cut rates ahead of schedule, and the rhythm of 'tight in Q1, loose in Q2' will be disrupted. Preliminary conclusion: Therefore, based on the above, I believe the market performance in Q1 2026 will not look good, accompanied by a wave of positive expectations landing in 2025. However, before the new Fed chair takes office, Q1 is a short-term layout window that I believe.

Lao Xu Q4: Do you think the market has a high expected weight on the 2026 midterm elections, and what is the potential impact of the midterm elections on the crypto market?

Jason: I believe the potential impact mainly lies in the fact that if the midterm elections are unfavorable for the Republican Party, then policies friendly to crypto development will be hindered, and the main driving force that the market is optimistic about comes from the ruling party. A ruling party's electoral defeat will directly undermine the market's bullish expectations.

Lao Xu: What do you think about the midterm elections? Do you have an estimate?

Jason: From historical patterns, the Republican Party is likely to lose the House of Representatives. In the 22 midterm elections since 1938, the ruling party has lost House seats 20 times. The only 2 exceptions were 'extraordinary' cases. Given the current situation, the Republican Party does not control significantly more House seats than the Democratic Party. Therefore, based on historical patterns and the current visible situation, the probability of the Republican Party losing the House is greater. Three major predictive models suggest a loss of about 18-28 seats. However, Trump still has a card to play, which is leveraging the new Federal Reserve chairman to gain the House, but this variable is not currently visible and will need to be assessed after May next year based on the new Fed chairman's actions and the resulting signs. For example, if the easing interest rates yield good data, that would be fine. However, if aggressive easing leads to a rebound in inflation, such as core PCE rising above 3.5%, and if the market questions the Fed's independence, that would further impact the Republican Party's disadvantage in the midterm elections. Even if the new Fed takes a 'moderate dovish' stance, causing GDP growth to rebound to 2.0%, unemployment to fall below 4.0%, and voter satisfaction to rise (but not significantly), the Republican Party may hold onto more seats, but they could still lose the House. Therefore, I am not optimistic about the Republican Party in the midterm elections. In other words, I am not optimistic about the market after the midterm elections. In summary, I believe the favorable measures from the new Fed in Q2 may temporarily boost a one-sided trend, but in Q3-Q4, the Republican Party's disadvantage in the midterm elections will undermine market confidence.

Jason's supplementary sharing part

An article, (VIX Tail Warning: Double-Peak Volatility is Coming). I will briefly summarize the article's meaning: On the surface, the fear index has been hovering at low levels of 12-14 for a long time, making the market seem very safe. But at a deeper level, the term structure with volatility shows a 'short low long high' structure. From experience and historical cases, this 'short low long high' structure indicates that there may be double-peak volatility in the future, meaning the market will face two waves of independent risk shocks rather than a one-time panic. The danger lies in that after the first wave of shock, the market may temporarily recover, leading investors to mistakenly believe that the risk has passed, and thus they may be caught off guard when the second wave hits. I strongly agree with the author's core view on future expectations: 'After the first wave of shock, the market may temporarily recover, leading investors to mistakenly believe that the risk has passed, and thus they may be caught off guard when the second wave comes.'

My understanding is that the first wave of events, the rate cut in September 2025 is the first wave, the second wave, broadening the view to 2026 should be a shallow rate cut cycle. This means that after the second wave of events lands and corrects, that is the opportunity worth bottom-fishing. In other words, the correction after the landing of the shallow rate cut cycle in 2026 is when the market will reprice assets more widely and profoundly based on real and limited liquidity improvements and economic conditions.

I agree with the view in the original text, 'Do not rush to increase positions after the first wave of shock.' At this current time point, defensive measures (such as lowering leverage and hedging strategies) must be superior to offensive measures (such as chasing highs). The real bottom-fishing can be postponed until the correction period after the rate cut. From a short-seller's perspective, there can also be opportunities to short after the rate cut, according to the logic in the text, there will be an even bigger opportunity to short on the right side next year, and only after a comprehensive blow to the market will the expected comprehensive bull market arrive. Do not be misled by the surface low volatility. The current volatility curve may indicate that the real storm is not that it will not come, but that it is still brewing and may hit the market in two waves.

Lao Xu Q5: Is the market's long-standing doubt about the risk of U.S. recession essentially resolved? Or does it still exist?

Jason: From 2023 to early 2025, the risk of recession has been hanging over the market like the sword of Damocles. I believe it still exists. However, at least in the last quarter or in 2026Q1, it is unlikely to happen. In fact, as long as Powell urgently cuts interest rates before the inflation target is achieved, it means there is no risk of recession; an emergency rate cut is a warning signal of recession.

Moreover, the unemployment rate still has room for buffer: the current unemployment rate is 4.3%, which is more than 1 percentage point away from the widely accepted recession threshold. Additionally, there is still a lag effect from the interest rate cut cycle that started at the end of 2025. Its stimulating effect will gradually manifest in 2026, potentially providing some support in Q1. The pause of QT will also provide liquidity support. However, I believe that 'no recession, no QE'; I don't think recession is something we need to worry about. A rebound in inflation is far more concerning for the market.


Lao Xu Q6: Will QE arrive in 2026?

Jason: Trump and Secretary of the Treasury Yellen are urging the Fed to cut interest rates mainly because after the passage of the Great America Act, the U.S. is about to enter the era of fiscal expansion 2.0. The biggest policy constraint is the rising debt and interest costs. Only by cutting interest rates can the interest costs come down, indicating that debt reduction is the primary goal of this U.S. government. Therefore, if the issue of U.S. debt is the core goal, I believe QE is an inevitable measure after the interest rate cut. The U.S. is facing a 'dilemma': the government's high debt interest makes lowering long-term rates a must-solve problem. The traditional toolbox may not be sufficient: simply cutting rates may not effectively lower long-term rates. So how to deal with long-term rates? My blind guess is yield curve control (YCC).

Lao Xu: What is the yield curve control mentioned here?

Jason: The Federal Reserve usually buys and sells short-term government bonds to influence short-term interest rates, thereby indirectly affecting long-term interest rates. Yield Curve Control (YCC) is a more 'brutal' measure. The Fed directly forces the yield of government bonds for a certain number of years to stay at a certain percentage level. How to achieve this is to directly use unlimited cash capabilities; if the market's 10-year government bond yield wants to be controlled at 2.1%, the Fed will use unlimited funds to buy 10-year government bonds in the market, driving the price up until the yield is firmly pressed down to 2%.

The essence of YCC is to spare no effort to lower long-term interest rates, providing ultimate, unlimited support for government debt and asset prices. The Bank of Japan has been using this tool for a long time. To do this, it is necessary to expand the balance sheet.

I think after the second round of rate cuts in 2026, we can expect something. It corresponds to the article I shared earlier, where the decline after the second shock is the real bottom-fishing opportunity, heralding the arrival of a comprehensive bull market, corresponding to the subsequent QE. A rate cut is just a rate cut; while the interest rate is low, there still needs to be actual liquidity injection, which is QE, that is the true liquidity boost for the market.

I believe that yield curve control is not a question of whether it will come, but rather, after the conventional means of 'second round of rate cuts' fail, it becomes an almost unavoidable endpoint. Therefore, expanding the balance sheet is the final destination. QE will definitely come, but I do not expect it in 2026.

I believe that Q1 is not the real time point; the real time point before QE is during Q2 after the new Fed's wave of rate cuts, during the midterm elections when the Republican Party is likely to lose, corresponding to the previously mentioned double-peak volatility theory. All these connections close the loop, and this big pit before QE is the real opportunity to position altcoins.