Friends, have you recently felt that your Bitcoin and Ethereum are not moving? Not to mention skyrocketing, even sideways trading seems a bit difficult. Behind this, there is actually an 'invisible hand'—the Federal Reserve's interest rate policy. Today, let's break it down and talk about how this high-interest rate environment is gradually draining liquidity from the crypto market.
1. Why is the Federal Reserve's 'hawkish grip' slow to loosen?
Let's first look at a set of hard data. Since July 2023, the Federal Reserve has kept interest rates firmly at 5.25%-5.50%, the highest level in over twenty years. This is not a sudden decision—they raised rates by 400 basis points between 2022 and 2023, as if pouring a bucket of ice water on the economy.
Why is it so harsh? Inflation! Although the inflation rate has dropped from its peak, core inflation is still hovering above 2.7%, far from the 2% target. Federal Reserve Chairman Powell's original words were: 'Unless there is greater confidence that inflation is sustainably returning to 2%, there will be no rate cuts.' In plain language, it means: until prices are fully stabilized, no one should expect me to loosen up!
What's even more heartbreaking is that the market originally hoped for two rate cuts in 2025, but now it seems we can only hope for one 25 basis point cut of mercy. This 'higher for longer' interest rate environment feels like an endless Mei Yu season, cooling down the risk market to its core.
2. Where has the money gone? The 'change of heart moment' in liquidity preference.
The most direct impact of high interest rates is a complete change in the temperament of capital. When interest rates were close to zero, everyone was anxious to throw their money into Bitcoin for a chance at tenfold returns. But now? Just buying U.S. Treasuries can earn a risk-free return of over 5%, who still wants to gamble in the crypto market?
This is not just me talking—research clearly shows that when interest rates rise, investors' risk preferences immediately 'reverse'. Just like how you wear long underwear when winter comes, funds automatically retreat to safer assets. Data shows that during high-interest periods, funds visibly rotate from high-risk assets like stocks and cryptocurrencies to bonds and money market funds. The narrative of Bitcoin as 'digital gold'? For now, it has taken a hit against real gold and risk-free rates.
And don't forget what the 'liquidity preference theory' founder Keynes said: the higher the interest rate, the more people are willing to hold cash. Now that the annualized return on cash in U.S. dollars is over 5%, it's like holding money while earning interest, whereas Bitcoin's volatility is often above 60%—if you were capital, how would you choose?
3. The true survival map of the crypto market: cryptocurrencies under pressure testing.
Having discussed so much theory, we must let the data do the talking. Although there isn't a complete monthly price table in the search results, the trend cannot be hidden: every time the Federal Reserve sends a hawkish signal, Bitcoin is likely to experience a short-term crash. For example, during the most aggressive rate hikes from 2022 to 2023, Bitcoin dropped from $60,000 to below $16,000. Ethereum also fell from $4,800 to below $900—a drop of over 70%, comparable to a major car accident scene.
Trading volume can tell the story. In a high-interest rate environment, the overall trading activity in the crypto market has significantly declined. The reason is simple: arbitrage funds have withdrawn. Previously, borrowing dollars was cheap, and arbitrage trading was rampant, with hot money flowing back and forth in the crypto market. Now that the cost of dollar borrowing is so high, the arbitrage space has been compressed, and this most active capital has naturally pulled out.
Volatility data is even more interesting. Although Bitcoin's 30-day annualized volatility often remains high at 40%-80%, in a high-interest rate period, this volatility manifests more as 'sudden drops and slow rises'—panic selling during downturns and weak rebounds. What does this indicate? There is insufficient buying capital to support the market.
4. Deep Impacts: The logic of asset allocation has completely changed.
This high-interest rate storm has not only overturned short-term trading but also the underlying logic of asset allocation.
First, the 'inflation hedging' narrative of cryptocurrencies has temporarily collapsed. It was often said that Bitcoin was an anti-inflation tool, but now that real inflation has arrived, the Federal Reserve's aggressive rate hikes have suppressed Bitcoin's performance. This indicates that cryptocurrency prices are currently more driven by liquidity than by inflation.
Secondly, the risk pricing model needs to be rewritten. In traditional models, high-risk assets should provide high return compensation. But now that the risk-free rate is at 5.5%, how high of a potential return must Bitcoin provide to make people overlook the risk of a halving? This leads to a decline in the attractiveness of the risk-return ratio for cryptocurrencies, and the allocation proportion of funds is actively lowered.
The key point is that high interest rates have exposed the 'beta attribute' of the crypto market. Previously, it was touted as having 'low correlation with traditional assets', but now it seems that when the Federal Reserve tightens, Bitcoin inevitably plummets alongside the Nasdaq. It resembles a liquidity amplifier rather than a safe haven.
5. Where to go in the future? Three key observation points.
Since high interest rates are not changing in the short term, we need to learn to adapt to the new environment. Next, keep a close eye on these three signals:
Inflation data is the real steering wheel. Pay close attention to the CPI and PCE inflation indicators. Only if they continue to return to around 2% can the Federal Reserve consider easing, and the crypto market can welcome fresh liquidity.
The end of the inverted yield curve may be a turning point. Currently, U.S. Treasury yields are still inverted (short-term rates higher than long-term rates), and once the inversion ends, it often signals a shift toward looser monetary policy.
The fund flow of Bitcoin spot ETFs is a leading indicator. Since the launch of spot ETFs, traditional funds have entered more conveniently. If there is continuous net inflow, it may indicate that large funds are starting to recognize the medium- to long-term value at current price levels.
Conclusion: Learn to hibernate in winter.
Ultimately, the Federal Reserve's high-interest rate policy is like switching on 'energy-saving mode' for the global market, making money more expensive, cautious, and selective. For cryptocurrencies, this is actually a stress test—shedding the speculative frenzy, only truly valuable and in-demand projects will survive.
As an investor, you either need to develop good skills in capturing market swings or patiently wait for the winds of policy change. Remember an old saying: 'Interest rates won't stay high forever; cycles always have their turn.' What you need to do now is to keep your powder dry, remain sharp, and wait for that eagle to finally get tired.
