Fed Rate Cut Triggers Bitcoin Plunge: Crypto Market Volatility and Future Outlook

Fed Rate Cut Triggers Bitcoin Plunge: Crypto Market Volatility and Future OutlookIn the early hours of December 19th, the Federal Reserve announced a 25-basis-point cut to its benchmark interest rate, hinting at a slower pace of future cuts. This triggered a significant drop in Bitcoin (BTC) price, plunging below $99,000 to a low of $98,744, representing a near 6% decline

Fed Rate Cut Triggers Bitcoin Plunge: Crypto Market Volatility and Future Outlook

In the early hours of December 19th, the Federal Reserve announced a 25-basis-point cut to its benchmark interest rate, hinting at a slower pace of future cuts. This triggered a significant drop in Bitcoin (BTC) price, plunging below $99,000 to a low of $98,744, representing a near 6% decline. The crash resulted in approximately 300,000 liquidations, totaling $849 million. Although Bitcoin later recovered to $101,731.2, narrowing the drop to 2.27%, the event underscored the extreme volatility of the cryptocurrency market.

Federal Reserve Chairman Jerome Powell stated during the press conference that the Fed is not permitted to hold Bitcoin, a matter requiring Congressional consideration, and that the Fed had no intention of changing existing laws. This statement also influenced market sentiment. Bitcoin had reached a historical high of $108,135 on December 17th, before significantly retracting to around $100,000 over the following two days. The rate cut announcement further exacerbated the decline, prompting panic selling among crypto investors and a broader cryptocurrency market downturn. Data showed Ethereum (ETH) falling over 5%, and XRP and DOGE each dropping over 6% within 24 hours.

Angel investor Guo Tao noted that while rate cuts are typically seen as positive for risky assets, the Fed's suggestion of fewer rate cuts in 2025 than previously anticipated heightened investor concerns about the future extent of monetary easing, thus fueling market sell-offs. Furthermore, rate cuts could weaken the dollar, and cryptocurrencies like Bitcoin often have an inverse relationship with the dollar. However, this inverse correlation wasn't immediately apparent in the short term, with the market's future uncertainty instead driving cryptocurrency price declines.

Zach Pandl, Head of Research at Grayscale, suggested that the sharp drop in Bitcoin's price may reflect an overemphasis on the theoretical possibility of Bitcoin becoming a strategic reserve asset. Grayscale Research predicts that more sovereign nations will adopt Bitcoin in the future, with sovereign wealth funds in Asia or the Middle East potentially taking the lead, given their already highly diversified portfolios.

JPMorgan, in a report, indicated that Donald Trump's November presidential election victory ushered in a new era for US cryptocurrencies, with the total crypto market cap increasing by approximately 65% since his win. The report suggested that the worst regulatory environment for the crypto market is behind it, but cautioned that the market might not see policy impacts for at least 9 to 12 months of Trump's term.

Since Trump's election, Bitcoin prices have steadily risen, surpassing $100,000, correlating with Trump's previous statements about establishing a Bitcoin strategic reserve. Financial markets generally consider Bitcoin an effective hedge against inflation and geopolitical risks.

However, it's important to note that Bitcoin was initially designed as a decentralized digital currency, but its monetary attributes are diminishing, as it's not widely used for payments. This is due to its high volatility and relatively high transaction fees and slow confirmation times, hindering its practicality in everyday transactions.

Liu Bin, Director of the Financial Research Office at the China (Shanghai) Pilot Free Trade Zone Research Institute (Pudong Reform and Development Research Institute), stated that Bitcoin's attributes are shifting towards a store of value, as evidenced by its recent extreme price volatility. The asset nature of Bitcoin has gained broad consensus, and its attributes are increasingly similar to gold. This shift reflects the market's evolving perception of its value and usage. Bitcoin's function as a medium of exchange has been impacted by its volatile price, making its monetary function less prominent; however, it remains used as a medium of exchange in specific contexts and communities.

Yu Jianing, co-chairman of the Blockchain Special Committee of the China Communications Industry Association, also pointed out several challenges to Bitcoin payments currently. Firstly, its price volatility makes it unsteady for actual payment scenarios, requiring merchants to immediately convert received Bitcoin into fiat currency to mitigate risk, adding operational complexity. Secondly, Bitcoin's network capacity and transaction speed may not meet the demands of high-frequency transactions, limiting its applicability in daily consumption scenarios. Furthermore, policy and legal uncertainties remain a significant issue.

So, can Bitcoin's "payment dream" still be realized? Yu Jianing believes that while Bitcoin's high volatility restricts its application in payment scenarios, it doesn't entirely eliminate its potential as a payment tool. In specific scenarios, particularly cross-border transactions, risk-averse payments, and environments with high decentralization needs, Bitcoin's payment functionality still holds significant advantages, such as its lack of reliance on third-party intermediaries. The future development of Bitcoin payments may depend on technological advancements and ecosystem improvements, such as the widespread adoption of scaling solutions like the Lightning Network, which can significantly enhance Bitcoin's transaction speed and cost-efficiency, thereby alleviating the limitations imposed by price volatility on its payment functionality and further blurring the lines between its payment and reserve functions.

In recent years, Web3.0 payments, based on blockchain technology, have become increasingly mature. Crypto industry giants like Coinbase, and traditional financial institutions such as Visa, Mastercard, Sequoia Capital, and Temasek, are investing in Web3.0 payments. Liu Bin explained that Web3.0 payments, based on blockchain technology, provide decentralized payment solutions, increasing transaction transparency and security. They enable faster transaction confirmations and settlements while reducing transaction costs and removing geographical limitations, facilitating cross-border payments. They can act as intermediaries between various national fiat currencies and between fiat and virtual currencies, improving cross-border payment efficiency. The investment from industry giants in Web3.0 payments is a significant trend in the crypto industry, a driving force for its development, and helps advance Web3.0 payment technology and its applications, potentially fostering innovation across the financial market and service models. However, this also presents challenges, including legal compliance, regulation, and technological security.

These companies need to cautiously advance the application of Web3.0 payments without compromising user trust and security. The Bitcoin plunge triggered by the Fed's rate cut and the ensuing market turmoil serve as a reminder of the extremely high risks associated with the cryptocurrency market. Investors should remain rational, avoid blind following or panic selling, adopt diversified investment strategies, closely monitor market dynamics and policy changes, and adjust their portfolios accordingly. At the same time, advancements in Web3.0 payment technology and improvements in the regulatory environment will have a profound impact on the future of Bitcoin's payment functionality and the stability of the entire cryptocurrency market. In the long term, the future development of the cryptocurrency market remains full of challenges and opportunities.