The cryptocurrency market has seen a 14% decline following the Federal Reserve’s rate cut on December 18, 2024, due to rising U.S. Treasury yields. Market capitalization fell from $3.66 trillion to $3.16 trillion, reflecting tightening financial conditions and decreased liquidity as investors prefer safer assets over cryptocurrencies. This trend highlights the vulnerability of digital assets to macroeconomic factors and Federal Reserve policies, indicating a difficult outlook moving into 2025.

The cryptocurrency market has undergone significant turmoil following the Federal Reserve’s policy announcement on December 18, 2024. The total market capitalization plummeted from $3.66 trillion on December 17 to $3.16 trillion by December 23, representing a staggering loss of $500 billion or 13.6% in just six days. This downturn illustrates the impact of rising U.S. Treasury yields, which have tightened financial conditions and negatively influenced speculative assets such as cryptocurrencies.

During its December 17-18 meeting, the Federal Reserve reduced its benchmark federal funds rate by 0.25%, decreasing the target range to 4.25%–4.50%. Despite this seemingly dovish stance, the accompanying FOMC statement revealed a cautious outlook, emphasizing ongoing inflation concerns, particularly in the services sector, and the objective of returning inflation to 2%. The Fed’s median forecast for the fed funds rate by the end of 2025 indicates a modest reduction to 3.9%, suggesting that restrictive monetary policy may persist longer than anticipated.

Accompanying data further illustrated the Fed’s cautious approach. The recent “Personal Income and Outlays” report from the Bureau of Economic Analysis indicated that annual core PCE inflation remained steady at 2.8% for November 2024, marking five consecutive months above 2.5%. Such data underscores the Fed’s reluctance to hastily loosen monetary policy, which could jeopardize progress in controlling inflation.

In response to the Fed’s announcement, the bond market experienced volatility, with the yield on the 10-year Treasury note rising from 4.40% on December 17 to 4.56% by December 23. This upward trend in yields reflects a reassessment of expectations regarding monetary policy and economic stability. Rising Treasury yields create tighter financial conditions, leading to decreased liquidity in the market, which is detrimental to cryptocurrencies that depend on abundant liquidity for growth.

As yields increase, the opportunity cost of holding cryptocurrencies rises correspondingly. With a 10-year Treasury note offering a risk-free return of 4.56%, investments in cryptocurrencies become less appealing compared to the more stable fixed-income assets. Alongside this, a climate of reduced risk appetite prompts investors to shift towards safer assets, resulting in further outflows from the cryptocurrency market.

The repercussions of soaring Treasury yields were manifested in the vast declines throughout the crypto market, reflecting the fragility of these assets in the face of macroeconomic shifts. This volatility exemplifies the intrinsic vulnerability of cryptocurrencies to external economic factors, such as sustained inflation and the Federal Reserve’s cautious monetary policy. As the new year approaches, these dynamics are likely to continue influencing the trajectory of the cryptocurrency market.

The cryptocurrency market operates within a broader financial ecosystem that is significantly influenced by monetary policy and macroeconomic conditions. In December 2024, the Federal Reserve made pivotal decisions aimed at controlling inflation and navigating economic uncertainty. Understanding the Federal Reserve’s actions and the subsequent impact on Treasury yields is crucial to grasping the challenges faced by the cryptocurrency market during this period. Rising Treasury yields can lead to tighter financial conditions that affect liquidity and investor sentiment, crucial elements for the health of speculative assets such as cryptocurrencies.

In summary, the cryptocurrency market’s recent downturn underscores its sensitivity to macroeconomic changes, particularly those stemming from Federal Reserve policies and rising Treasury yields. The substantial loss in market capitalization reflects a broader trend of diminished risk appetite among investors, as increased yields shift capital towards safer assets. As the Federal Reserve maintains its cautious stance in light of persistent inflationary pressures, the outlook for cryptocurrencies remains uncertain and challenging as the market navigates the complexities of 2025.

Original Source: www.cryptoglobe.com

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