Cryptocurrency in a Relaxed Environment: The Gap Between Expectations and Reality

For cryptocurrency investors, a familiar logic is repeatedly echoed: that central bank easing monetary policy leads to rising crypto assets. This narrative seems intuitive and easy to accept, but often fails under scrutiny when examined in detail. Recent market volatility has once again reminded us that we need a more rigorous perspective to evaluate the widespread assumption that “loose policies are beneficial to cryptocurrencies.”

The Logical Pitfalls of Mainstream Narratives

The most common claim in the market is: rate cuts, balance sheet expansion, and declining yields push investors toward the risk curve’s far end, with cryptocurrencies conveniently positioned at the extreme. This logic was reinforced during extreme periods like 2020, but it overlooks a key issue—our understanding of the relationship between cryptocurrencies and quantitative easing largely stems from inference during a few special periods, rather than from deep historical experience.

In fact, throughout the entire history of cryptocurrencies, instances of a liquidity environment strictly defined as “quantitative easing” are few and far between. Bitcoin was created in 2009, but there was no meaningful market structure or trading infrastructure at that time. Even during the second round of quantitative easing (2010-2012), cryptocurrencies remained a small-scale, retail-led experiment. It wasn’t until the third round of QE (2012-2014) that “persistent balance sheet expansion” and active crypto markets overlapped for the first time, but even then, the sample size was too small and the signal-to-noise ratio too low.

The Forgotten “Normal” Period

There is a widely overlooked period in history. After the third round of QE, for a long time (2014-2019), the Federal Reserve’s balance sheet remained relatively stable or even attempted to shrink. In this “non-easy” environment, cryptocurrencies still experienced significant cyclical volatility. This fact alone should warn us: “Printing money = crypto rising” is an oversimplification. Liquidity environment is indeed important, but it is not the sole driver.

The Most Misunderstood Data Points

The pandemic period of 2020-2022 indeed demonstrated “liquidity glut and yields nowhere to be found,” with cryptocurrencies reacting strongly. But this period was fundamentally special: emergency easing policies, large-scale fiscal stimulus, and behavioral shifts caused by social restrictions—these factors created an extraordinary environment. They prove such phenomena exist, but do not establish a universal rule.

Subsequent quantitative tightening (2022-2025) has made things more complex. After stopping QT, the Fed recently announced it would start purchasing about $40 billion of short-term government bonds from December, explicitly describing it as “reserve management” and “money market stabilization operations,” rather than a new round of stimulus. This distinction is crucial because markets trade on the direction and marginal changes of liquidity conditions, not on the labels we assign to policies.

Four Dimensions of Liquidity

When discussing “loose policies benefiting cryptocurrencies,” we need to distinguish four different factors, as they do not always change in sync:

First, balance sheet expansion—this is the most straightforward but also the most easily overestimated factor. Cryptocurrency markets tend to react before central banks explicitly announce bond-buying actions.

Second, expectations and actual rate cuts—these are more attractive for long-term assets because they lower the discount rate of future cash flows. Cryptocurrencies’ response to declining yields is usually quite stable.

Third, the dollar’s trend—when the dollar weakens, dollar-denominated assets tend to benefit. This often aligns with balance sheet expansion but does not always occur simultaneously.

Fourth, risk sentiment—perhaps the most unpredictable factor. Even with ample liquidity, if market risk aversion rises, cryptocurrencies may still decline.

Market’s Anticipatory Trading

A frequently overlooked phenomenon is that markets rarely wait for liquidity to actually arrive; they often start trading on policy directions long before the data reflect them. Cryptocurrencies are especially prone to this—they tend to react to expectations, such as shifts in central bank tone, signals from balance sheet policies, and anticipated interest rate paths, rather than to the slow, gradual impact of actual asset purchases.

This explains why cryptocurrency prices often move ahead of yield declines, dollar weakness, or even before any substantial expansion of the Fed’s balance sheet. In other words, the crypto market is highly sensitive to policy shifts, but this reaction is inherently unstable—it is based on expectations, which can be rewritten at any moment.

The Different Nature of the Current Cycle

This cycle is fundamentally different from 2020. We do not see emergency easing policies, massive fiscal shocks, or sudden plunges in yields. What we see is a marginal normalization of policies—after a long period of tightening, the system environment has become slightly more accommodative.

For the crypto market, this does not mean prices will immediately surge, but rather that the environment is subtly shifting. When liquidity ceases to be a barrier, assets at the risk curve’s far end do not need to make dramatic moves—they often perform well simply because the market environment eventually permits it.

Short-term Volatility Still Dominates

Although an easing financial environment increases the probability of positive returns for high-beta assets like cryptocurrencies, it does not guarantee the timing or magnitude of gains. In the short term, crypto prices are still influenced by market sentiment and position fluctuations, and their trajectory depends not only on macro policies but also on leverage levels and participant behavior.

Historical data supports a directional relationship rather than a deterministic one—loose environments are more conducive to crypto performance, but this is a probabilistic advantage, not an absolute guarantee. Liquidity helps, but it does not override all other influencing factors. Markets still need to balance expectations, risk sentiment, technical factors, and macro cycles.

In summary, the impact of loose policies on cryptocurrencies is real but far more complex than the mainstream narrative suggests.