Bitcoin national reserve dream shattered? Powell's words collapse the crypto market
Author: Tuo Luo Finance
The long-awaited interest rate cut has arrived as scheduled, but the market is not as jubilant as usual.
In the early hours of December 19, Beijing time, the Federal Reserve announced its last interest rate decision of the year, deciding to lower the target range for the federal funds rate by 25 basis points to 4.25%-4.50%, successfully achieving a third consecutive rate cut. So far, the cumulative reduction in this round of rate cuts by the Federal Reserve has reached 100 basis points.
Even with profit-taking behavior, the release of liquidity is a significant boon for risk markets, but this time, it is different. The U.S. stock market fell first as a sign of respect, giving a pricing response through action. According to Choice data, as of the close on December 18, Eastern Time, the Nasdaq fell by 3.56%, the S&P 500 index dropped by 2.95%. The Dow Jones Industrial Average plummeted by over a thousand points, with a decline of 2.58%, marking its 10th consecutive day of decline, the longest streak since October 1974.
The cryptocurrency market followed suit, with Bitcoin briefly dropping below $100,000, hitting a low of $99,000, and ETH experiencing a maximum drop of over 7.2%, while altcoins saw a widespread decline of over 10%. Why did this rate cut lead to such results?
01 Hawkish Expectations Trigger Market Panic, Powell Slaps Trump
An interest rate cut is a good thing, but the risk market speculation revolves around two words—expectations. Federal Reserve Chairman Powell issued a long-awaited hawkish statement alongside the rate cut, stating that the December rate cut decision was more challenging but was the "right decision," emphasizing that the Federal Reserve would be "more cautious" when considering adjustments to the policy rate in the future. Whether the Federal Reserve will cut rates in 2025 will depend on future data rather than current forecasts, and the Fed will consider further rate cuts only after inflation improves.
Compared to previous decisions that were relatively unanimous, this rate cut also saw divisions, with Cleveland Fed President Harker casting a dissenting vote, arguing that the rate cut should be skipped, reflecting the increasing resistance to rate cuts.
In the economic outlook released by the Federal Reserve that day, the economic growth rate was revised upward, and the unemployment rate was lowered, also indicating a hawkish stance. From the dot plot, based on this outlook, 10 out of 19 members of the Federal Open Market Committee believe that by the end of 2025, the target range for the federal funds rate will drop to between 3.75% and 4%. Considering the so-called "more cautious" approach, it seems that the Federal Reserve can only cut rates a maximum of two times next year, a significant reduction from the four cuts expected in September.
Against this backdrop, the U.S. stock market, which had already digested the December rate cut news, experienced a significant drop, as the future soft landing remains to be evaluated. In fact, from a macro perspective, the severity is still within a controllable range. Although hawkish rhetoric has emerged, the consensus remains that rate cuts in 2025 are likely, albeit with a slight increase in the neutral rate. From the Federal Reserve's perspective, this hawkish rhetoric is likely a preemptive warning to address the uncertainties of Trump's subsequent governance, thereby reserving some space to prevent inflation from being pushed up by Trump's policy proposals.
Although the expectations of rate cuts have a significant impact on risk markets, the disaster in the cryptocurrency market is even more severe. A single statement from Powell caused Bitcoin to drop over 5%, further dragging down the crypto market. According to Coinglass data, as of 5 PM, over 260,000 people globally were liquidated in the past 24 hours, with a total liquidation of $780 million, including $661 million in long positions and $118 million in short positions.
At the press conference, when Powell was asked whether the Federal Reserve would establish a national Bitcoin reserve, he replied, "We are not allowed to own Bitcoin. The Federal Reserve Act specifies what the Fed can own, and the Fed is not seeking to change that. This is a matter for Congress to consider, but the Fed does not wish to change the law."
Powell's attitude undoubtedly reflects opposition to cryptocurrencies, as the Federal Reserve does not consider including Bitcoin on its balance sheet and does not wish to discuss the issue. Furthermore, during his current term, Powell has clearly stated that he will not resign, and Trump does not have the power to replace him.
Coincidentally, not long ago, Trump made his usual "greatness" remarks, stating that he would do great things in the cryptocurrency field. When asked whether the U.S. would establish a Bitcoin strategic reserve similar to the oil reserve, he bluntly said, "Yes, I think it will." Earlier, an anonymous transition team insider revealed that Trump hoped to see Bitcoin surpass $150,000 during his term, as cryptocurrency is "another stock market" for him. Considering Trump's explicit assertion that "the stock market is everything," this information holds a high degree of credibility.
On December 17, market news again reported that Trump plans to establish a strategic Bitcoin reserve (SBR) through an executive order, intending to use the Treasury's Exchange Stabilization Fund (ESF) to purchase Bitcoin, which now exceeds $200 billion. On the same day, the Bitcoin Policy Institute drafted the full text of this executive order, stating that the order could take effect once Trump signs it upon taking office.
Amidst a series of stimulating news, the national Bitcoin reserve plan seems just within reach, and the market has high hopes for it. Voting on Bitcoin reserves on Polymarket has risen from 25% to 40%. Yesterday, Bitcoin surged, briefly challenging the new threshold of $110,000. However, Powell's remarks undoubtedly slapped Trump in the face; if the Federal Reserve does not cooperate, the so-called national reserve will face significant obstacles.
02 Federal Reserve Unwilling, Bitcoin National Reserve Faces Many Challenges
Taking the Bitcoin Act proposed by Senator Cynthia Lummis as an example, this act requires the government to purchase up to 200,000 Bitcoins annually over five years, totaling 1 million. Based on a price of $100,000 per Bitcoin, excluding premiums during purchases, the government would need to raise at least $100 billion. In terms of operational details, funding sources could consist of three parts: first, using the Federal Reserve's treasury remittances, with a maximum of $6 billion per year. This option is unlikely because the Federal Reserve is currently in a state of loss, exceeding $200 billion. In fact, since September 2023, the Federal Reserve has not remitted any funds to the Treasury. Second, transferring from the Federal Reserve's capital surplus account to the Treasury's general fund. This method was used in the FAST (Fixing America's Surface Transportation) Act, but if used to purchase Bitcoin, it would likely raise public concerns about the Federal Reserve's independence.
Compared to the first two options, the third option is more feasible: adjusting the fair value of gold at market prices, allowing the Federal Reserve to marketize the profits from the official value of the Treasury's gold reserves. According to the Federal Reserve's financial report, its official reserve assets include gold, special drawing rights, and coins. The gold refers to the Treasury's gold dollar-denominated certificates, calculated at the official price of slightly above $42.22 per troy ounce, with a nominal value of $11 billion. If calculated at the market price of $2,700, this reserve would reach $703.4 billion. In fact, regardless of how Bitcoin is purchased, the U.S. Treasury needs the Federal Reserve's strong support.
On the other hand, U.S. national reserve assets need to possess high liquidity, which helps maintain the dollar's status as an international reserve currency and serves as a last resort for payment. From this perspective, the highly volatile Bitcoin seems to fall short of the standard. If the U.S. government significantly purchases Bitcoin, although it would further drive up its price, it would concentrate Bitcoin heavily on the government side. When it comes to large-scale selling, the impact of slippage and volatility would be substantial, potentially leading the government to bear a massive impairment loss. Moreover, the rise of non-sovereign currencies could somewhat undermine global recognition of the dollar.
Due to a combination of various reasons, the Federal Reserve's dislike for crypto is deeply ingrained, and Powell has repeatedly expressed opposition to cryptocurrencies. Notably, in this statement, Powell also left room for consideration, saying, "This is something Congress should consider," meaning Congress could amend the law to include Bitcoin in reserves. However, given the complex entanglements of interests and the broad implications, the likelihood of functional amendments is minimal.
This is precisely why the Exchange Stabilization Fund's purchases are relatively more credible. Unlike the Federal Reserve's path, this fund is under the U.S. Treasury, and with presidential approval, the Treasury can bypass Congress to allocate funds, directly using the ESF for trading in gold, foreign exchange, and other credit and securities instruments, making its use relatively flexible.
Overall, although Trump has gained control of both houses during his current term, concentrating power significantly, and he actively announces related plans, the probability of Bitcoin becoming a strategic reserve asset for the U.S. remains low. However, for the unconventional Trump, anything is possible. After all, from a practical perspective, the U.S. government already holds over 210,000 Bitcoins, ranking first among global governments. If partial reserves are realized, the appreciation of Bitcoin could still play a very positive role for the heavily indebted U.S.
03 Institutional FOMO Rising, Crypto Market Faces Path Divergence
In the long term, despite briefly encountering Black Thursday, the outlook for the crypto market remains bright under foreseeable regulatory benefits. As we approach 2025, institutions are showing highly optimistic sentiments.
Bitwise has provided clear price data in its 2025 forecast, stating that the number of countries holding Bitcoin will double, Bitcoin ETFs will see more inflows, and Bitcoin will reach $200,000. If a strategic reserve is realized, there is no upper limit, potentially reaching a price of $1 million by 2029. Ethereum is expected to undergo a narrative shift in 2025, driven by Layer 2, stablecoins, and tokenization projects, reaching $7,000, while Solana aims for $750. Additionally, it states that 2025 will be the year of IPOs for crypto companies, with Coinbase becoming the largest brokerage.
VanEck's expectations are more phased, indicating that the cryptocurrency bull market will continue to develop in 2025, reaching its first peak in the first quarter. At this cycle's peak, Bitcoin's price is expected to be around $180,000, while Ethereum's price will exceed $6,000. Other well-known projects, such as Solana and Sui, may break through $500 and $10, respectively. After the first quarter, BTC's price is expected to correct by 30%, with altcoins experiencing even larger declines of up to 60%. The market will consolidate in the summer and then rebound in the fall, with major tokens regaining growth and returning to previous historical highs by the end of the year.
Compared to Bitwise, VanEck is more optimistic, believing that Bitcoin reserves will become a reality, with the federal government or at least one state (such as Pennsylvania, Florida, or Texas) establishing Bitcoin reserves. It also expects the number of countries using government resources for mining to increase from the current seven to double digits. On the other hand, VanEck has also made predictions for sub-sectors, believing that stablecoins, DeFi, NFTs, Bitcoin Layer-2, RWA, and AI agents will experience rapid development. By 2025, DEX trading volume will exceed $4 trillion, accounting for 20% of CEX spot trading volume; NFT trading volume will reach $30 billion; Bitcoin Layer-2 total value locked (TVL) will reach 100,000 BTC; the total value of tokenized securities will exceed $50 billion; and on-chain activities of AI agents will also exceed 1 million.
Presto's predictions are consistent, stating that Bitcoin's price will reach $210,000, the ETH/BTC ratio will rebound to 0.05, and Solana will break through $1,000, while believing that a sovereign country or S&P 500 company will include Bitcoin in its treasury reserves.
From last year's predictions, VanEck's success rate is about 56.6%, while Bitwise is around 50%, making the credibility from an institutional perspective quite good. Overall, institutions expect Bitcoin's peak price in the coming year to be around $200,000, while Ethereum is expected to be around $6,000-$7,000, with very strong bullish sentiment.
However, from the currently evident path divergence, the seemingly bright bull market still harbors risks everywhere, especially for altcoins, which are most susceptible to liquidity impacts. In fact, even now, many altcoin holders find that their coin prices have not even returned to previous bear market levels.
The lack of market liquidity can also be seen from Binance's new tokens; the "great exchange" effect of listing new coins is continuously weakening, with surges followed by declines becoming the main theme. According to statistics from Tuo Luo Finance, as of December 19, the average decline of the 10 new tokens listed on Binance since November has exceeded 57.94%. For example, PENGU, which was just listed on December 17, surged to $0.07 before quickly retracting, currently reported at $0.033, a decline of 51.81%.
Due to market difficulties and numerous doubts, Binance Wallet recently launched the Binance Alpha feature, hoping to invigorate trading volume by exploring low-market-cap potential tokens and stimulate the wallet ecosystem, maintaining its leading advantage in fierce market competition. However, from the current perspective, the short-term increase in platform activity is evident, while the long-term effects remain to be discussed.
In this regard, holding mainstream tokens may be the best choice in this bull market. Currently, the crypto market has rebounded, with Bitcoin reported at $101,652 and ETH at $3,674.