Liquidity is withdrawn: when the Fed "disappoints" and the BoJ "triggers" the domino effect

The Fed Cuts Rates, but the Market Sees Only Future Restrictions

On December 11th, the U.S. Federal Reserve made the expected move: a 25 basis point cut. On paper, everything seemed to follow the script – market expectations were aligned, and the move appeared to be the first step toward a more accommodative phase. But reality was completely different: U.S. stocks and cryptocurrencies plummeted together, and risk appetite evaporated within hours.

This paradox reveals something fundamental: a rate cut does not automatically mean more liquidity in circulation. The real news was not in the 25 basis points, but in what the Fed explicitly denied looking ahead to 2026. While the market previously priced in 2-3 additional reductions for that year, new projections indicate just one cut. Even more significant: 3 of the 12 voters opposed the cut itself – a clear sign that inflation fears are still alive among decision-makers.

The logic is subtle but decisive. Investors do not evaluate risky assets based on the absolute level of interest rates, but on expectations about future liquidity. When they realize that this cut represents a limit, not an opening, positions built on optimistic scenarios begin to unwind. It’s like taking a painkiller that temporarily masks the symptom without curing the disease: the market feels temporary relief, but doubts remain.

Bitcoin and other major crypto assets faced pressure not because they received specific bad news, but because the only news that mattered – the arrival of abundant liquidity – simply wasn’t there. When futures basis narrows, marginal purchases from exchange-traded funds weaken, and the overall willingness to take risks declines. Prices naturally settle at more conservative levels.

The True Turning Point: BoJ Breaks the Yen Cheapness Taboo

If the Fed only disappointed expectations, the Bank of Japan on December 19th will do something much more disruptive. With a probability close to 90%, the policy rate will rise from 0.50% to 0.75% – the highest level in thirty years.

It seems a modest adjustment on paper, but it contains a structural catastrophe for the global financial system. For decades, Japan has been the low-cost financing mine for international capital: investors borrow yen almost at zero cost, convert it into dollars, and pour it into U.S. stocks, cryptocurrencies, and high-yield assets in emerging markets. This is not a short-term arbitrage but a trillions-of-dollars capital structure so embedded in asset prices that no one perceives it as a risk anymore.

Once the BoJ enters a tightening cycle, this hypothesis crumbles. It’s not just the cost of financing that rises – it’s the yen itself that from a funding currency becomes a potential appreciating asset. Suddenly, the interest rate differential (the “carry”) is no longer a guaranteed gain, but accompanied by exchange rate risk. The risk/reward ratio deteriorates rapidly.

So what do arbitrage capital flows do? They sell everything. They do not distinguish between asset quality, fundamentals, or prospects – they sell solely to reduce overall exposure and repay yen-denominated debt. U.S. stocks, cryptocurrencies, emerging market bonds: everything declines together. It’s a “mass sell-off” because the driver is not valuation, but the mechanical need to unwind leverage.

History has already shown this film. In August 2024, when the BoJ raised the rate to 0.25% – a move that would traditionally be considered non-aggressive – Bitcoin plunged 18% in one day. The market took nearly three weeks to recover, not because fundamentals changed, but because the carry trade machinery had to unwind the accumulated leverage.

This time, it’s not an unexpected event, but the market already knows that the risk is real – and that’s precisely what makes the danger even sharper. Expectations do not always translate into total risk absorption.

December: When Holidays Become a Multiplier of Decline

Starting December 23rd, major North American institutional investors enter holiday mode. At first glance, it’s just a calendar fact, but for crypto markets, it means something devastating: structural liquidity disappears at the most dangerous moment.

During a normal week, if a shock occurs, there are market makers, arbitrage funds, investors ready to provide counterparty and absorb selling pressure. Prices might fall, but gradually, allowing for rebalancing.

Holidays change the game. Less liquidity means less absorption capacity. A shock that normally unfolds over trading days compresses into hours. Prices do not find equilibrium gradually but jump violently downward.

And the timing is terrible: holidays coincide exactly with the simultaneous release of two macro uncertainties – the “rates down but future limits” signal from the Fed, and the BoJ’s rate hike. Under normal circumstances, the market would have weeks to digest these changes. In December, it faces all of them within a very thin liquidity window.

The result is an amplifying effect: when the supply of sell orders hits a shallow market, the cascade becomes almost mechanical. A price drop forces leveraged positions to liquidate, which generates even more selling pressure, amplified by the lack of counterparties. Volatility explodes not because new bad news emerges, but because existing uncertainties are all dumped at once.

Historical data confirms this: the period from December 23rd to early January always shows volatility above the crypto market’s annual average, regardless of how the year has gone so far.

How to Naturally Block the Cycle: Resilience Strategies

In this context, the first instinct of investors is to seek protection. How do you “block” this natural contraction cycle?

The most honest answer is: not completely, but you can reduce exposure.

First, scale down leveraged positions before liquidity disappears. December is not the time for high-leverage trades; it’s the time to consolidate and de-risk. Carry traders waiting until the last moment risk being trapped in forced closures.

Second, understand that this is not a trend reversal but a structural recalibration. If your horizon is multi-year, year-end volatility is short-term noise, not the final verdict. But if your timeline is monthly, you must respect macroeconomic calendars and liquidity physics.

Third, institutional investors are already building defensive positions: less leverage, more cash, waiting for January 2nd. It’s a pragmatic approach: don’t fight the tide, wait for it to retreat.

The Overall Picture: Repricing, Not Capitulation

Putting the pieces together: the current crypto correction is not a trend reversal but a phase of repricing triggered by the change in the direction of global liquidity.

The Fed has cut rates but closed the door on further easing. The BoJ is starting to tighten, disintegrating the carry trade structure that supported risky assets for years. And December’s calendar compresses everything into a thin liquidity window.

For high-valuation, highly leveraged assets – many crypto tokens fall into this category – the pressure is natural, not abnormal. It’s the market revising the assumptions on which previous prices were based.

The real question is not “where will prices go,” but “when and how will liquidity return”. When offices reopen in January, when the BoJ completes its initial tightening cycle, and when the Fed provides more clarity on 2026 – then the market can start rebuilding a narrative.

For now, December remains the month in which the natural cycle of global liquidity contracts, and crypto assets, due to their sensitivity to capital flows, feel it first. It’s not a verdict, but a temporary pressure. The medium term will depend on how these macro variables actually unfold in the coming months.