-
The recent turmoil in the crypto market saw over $1.25 billion in liquidations after the Federal Reserve revised its inflation forecasts and interest rate outlook.
-
Market analysts consider this correction a temporary flushout, anticipating a bullish recovery and potential altcoin season by late December.
-
Despite current macroeconomic turbulence, Bitcoin remains buoyed by strong institutional adoption and decreasing sell-side liquidity, indicating long-term bullish sentiment.
The crypto market faced massive liquidations and a 10% drop following the Fed’s inflation forecast, but analysts predict a rebound ahead.
Inflation Forecast Triggers Massive Corrections in the Crypto Market
According to Coinglass data, Bitcoin recorded over $45 million in liquidations, while Ethereum experienced approximately $30 million in losses. This significant correction was prompted by the Federal Reserve’s decision to cut interest rates by 25 basis points on Wednesday.
Typically, interest rate cuts are seen as bullish for risk assets, including cryptocurrencies, as they signal a looser monetary policy. However, the market reacted sharply to the Fed’s projections for 2025. Jerome Powell indicated expectations of rising inflation and only two interest rate cuts anticipated in the following year.
While these liquidations drew significant attention, the impact on traditional markets was even more pronounced, with nearly $1.5 trillion evaporating from the US stock market. Such dramatic liquidations are reigniting fears of an extended bearish cycle.
“Hey guys, now that the bull market’s officially over, I just wanted to extend a wholehearted thank you to everyone. I’ll be deleting all crypto-related socials and logging off,” remarked one influencer on X (formerly Twitter).
Despite the pronounced selling pressure, many analysts assert that the current liquidation wave represents a mere short-term flushout.
“Bitcoin Market Sentiment. It’s the same story every time, and it never changes. Markets aren’t designed for the majority to win. Corrections are a natural part of bull markets,” wrote notable analyst ‘Titan of Crypto’.
Other analysts, such as Philakone, highlighted that these types of liquidations often occur towards the end of a bullish year, marking a cooling-off period. He also predicted a resurgence of bullish sentiment post-December 17, continuing into early January.
There are also indications of an impending altcoin season. Increased liquidation for Bitcoin could decrease its market dominance and enhance opportunities for major altcoins like Ethereum and Solana.
“If you think the altcoin season is over, you need to know this: The total altcoin market cap (excluding BTC & ETH) is sitting around $1.05 trillion. It’s testing the previous altcoin market cap high from November 2021. The last time a similar situation occurred was in February 2021, when the altcoin market cap approached its January 2018 high,” noted Lark Davis.
Despite the Federal Reserve’s forecast causing short-term turbulence, it’s essential to recognize that Bitcoin has appreciated nearly 130% year-to-date. Moreover, many developments within the crypto sector overshadow these macroeconomic fluctuations.
MicroStrategy, led by Michael Saylor, which holds nearly 2% of Bitcoin’s total supply, has been actively purchasing Bitcoin since November, including a significant acquisition of $3 billion worth of BTC during December when prices hovered above $100,000.
Additionally, other public companies like Marathon Digital Holdings (MARA) and Riot Platforms have adopted similar Bitcoin acquisition strategies this month, further reinforcing confidence in Bitcoin’s long-term value. Notably, potential regulatory changes across various jurisdictions are also fostering optimism for Bitcoin’s future.
Hence, while current macroeconomic headwinds have clouded the immediate outlook, the long-term scenario for Bitcoin in 2025 still appears optimistic.
Shrinking Supply Signals Potential Bitcoin Supply Shock
One of the primary reasons for the anticipated bullish momentum for Bitcoin lies in its supply and demand dynamics.
Data from CryptoQuant indicates that the Bitcoin market could be on the brink of a supply shock as demand steepens while the available supply contracts. Demand for Bitcoin has surged, with accumulation addresses increasing by 495,000 BTC monthly.
Moreover, the total stablecoin market cap has recently reached $200 billion, indicating an influx of fresh liquidity. Increasing optimism surrounding supportive pro-crypto policies and possible US government initiatives further stimulates market demand.
On the flip side, sell-side liquidity has contracted to 3.397 million Bitcoin, the lowest level observed since 2020, encompassing exchanges, miners, and over-the-counter markets. The inventory ratio, which quantifies the duration current supply can satisfy demand, has fallen precipitously from 41 months in October to just 6.6 months, illustrating the tightening conditions in the market.
This potential supply shock, along with macroeconomic factors, may spell trouble for bullish continuation in the near future.
Conclusion
In summary, while the crypto market is navigating through turbulent waters following the Fed’s inflation projections, the underlying fundamentals for Bitcoin and the broader market remain promising. Strong demand, diminishing supply, and institutional interest set the stage for a potential recovery. As we approach the end of the year, investors and analysts will be keenly watching for signs of market stabilization and renewed bullish sentiment.
