The cryptocurrency market has experienced significant losses in the aftermath of the Federal Reserve’s December 18, 2024, policy announcement. Total cryptocurrency market capitalization has plunged from $3.66 trillion on December 17, just 24 hours before the Fed’s announcement, to $3.16 trillion as of December 23.
This $500 billion, or 13.6%, loss in under a week highlights the influence of rising U.S. Treasury yields, which are tightening financial conditions and putting pressure on speculative assets like cryptocurrencies. Here’s a closer look at how and why this is happening.
The Federal Reserve cut its benchmark federal funds rate by 0.25% during its December 17-18 meeting, bringing the target range to 4.25%–4.50%. While this may seem dovish, the accompanying FOMC statement and economic projections, which were released at 2:00 p.m. ET on December 18, highlighted a cautious approach. In the FOMC statement, the Fed emphasized that inflation remains elevated, particularly in categories like services, and reiterated its long-term goal of returning inflation to 2%. The FOMC’s projections indicated that the median forecast for the federal funds rate by the end of 2025 is 3.9%, reflecting policymakers’ expectation that restrictive monetary policy will need to remain in place longer than previously thought.
Projections released alongside the statement painted a clearer picture of the Fed’s stance. The “dot plot” showed that the median forecast among policymakers anticipates only two additional rate cuts in 2025, reducing the federal funds rate to 3.9% by year-end. This is a stark revision from the September 2024 meeting, when four cuts were expected, signaling that the Fed believes restrictive monetary policy will need to remain in place longer than previously thought. The longer-term neutral rate was revised slightly upward to 3%, reflecting a gradual adjustment in policymakers’ views of inflation and economic conditions.
The Fed’s cautious approach aligns with persistent inflationary pressures reflected in the latest data. On December 20, the Bureau of Economic Analysis released the “Personal Income and Outlays” report for November 2024, which revealed that annual core PCE inflation—the Fed’s preferred measure—remained steady at 2.8% in November 2024, defying expectations of a decline. This marked the fifth consecutive month where core PCE inflation exceeded 2.5%. The Fed’s decision to slow its pace of rate cuts reflects its determination to avoid a premature loosening of monetary policy that could risk reversing recent progress on inflation.
The bond market reacted sharply to the Fed’s messaging. The yield on the 10-year Treasury note rose from 4.40% on December 17 to 4.56% by December 23. Rising yields reflect the market’s recalibration of expectations for monetary policy, inflation, and economic growth. Higher yields create a “domino effect” across financial markets, with significant implications for cryptocurrencies.
Higher Treasury yields tighten financial conditions. Cryptocurrencies thrive in an environment of abundant liquidity, but rising yields signal reduced liquidity as investors move capital into safer, higher-yielding fixed-income assets. This shift diverts funds away from speculative markets like crypto, adding to selling pressure.
Rising yields increase the opportunity cost of holding cryptocurrencies, which offer no guaranteed returns. A 10-year Treasury note now provides a 4.56% risk-free return, making it a more attractive investment compared to volatile digital assets.
Rising yields coincide with reduced risk appetite among investors. As borrowing costs increase and financial conditions tighten, riskier assets like cryptocurrencies often see outflows as investors reallocate to safer havens.
The effects of rising yields are evident across the crypto market. Total market capitalization fell by $500 billion in less than a week, reflecting widespread declines across major assets. While cryptocurrencies are not directly tied to earnings or valuations like stocks, their reliance on liquidity and speculative sentiment makes them particularly vulnerable to macroeconomic shifts.
The recent sell-off highlights the vulnerability of cryptocurrencies to macroeconomic factors. Rising Treasury yields, sticky inflation, and the Federal Reserve’s cautious stance have created a challenging environment for speculative assets. As we head into 2025, these factors will likely continue to dictate the trajectory of the crypto market.
