Bitcoin recovery expected as liquidity conditions change, but US macro remains a threat
Key takeaways:
Federal Reserve balance-sheet limits and possible repo operations point to improving liquidity conditions that could boost Bitcoin and other risk assets.
Fiscal strain and sector weakness currently weigh on markets, but easing tariffs and a targeted stimulus plan may support a recovery in crypto demand.
Bitcoin (BTC) and the broader crypto market could remain under pressure ahead of the upcoming US Federal Reserve interest rate decision on Dec. 10. Expectations for the direction of monetary policy remain highly split, with concerns over inflation clashing against signs of slowing economic activity.
Traders are divided between a 0.25% cut and keeping rates steady at 4%, based on implied odds on government bond markets. The more cautious Fed members argue that US President Donald Trump’s tariffs have added inflation pressure, reducing the room to ease rates and support growth. At the same time, the US job market shows clear signs of cooling, according to reports from BlackRock.
Blaming Bitcoin’s weakness solely on Fed appears misguided
Concerns with sticky inflation have been regularly cited by Fed officials. “I worry that restrictive monetary policy is weighing on the economy, especially about how it is affecting lower-and middle-income consumers,” Fed Governor Christopher Waller said on Monday. Waller dismissed rumors that the missing official data, resulting from the government shutdown, has hurt the Fed’s visibility.
Still, blaming Bitcoin’s weakness only on the Fed seems inaccurate, given that the downtrend started in early October. US import tariffs helped narrow the monthly government deficit, and the Fed’s balance sheet continued to shrink, causing the US dollar to strengthen against a basket of major currencies. Historically, Bitcoin holds an inverse correlation to the dollar Index (DXY).
Pinpointing the exact trigger behind Bitcoin’s weakness since the Oct. 6 all-time high is nearly impossible. Financial conditions worsened as freight activity slowed, housing markets softened, and companies faced tighter cash flows, according to a Savvy Wealth report. As a result, Bitcoin’s decline may stem more from broad risk aversion than from dollar strength alone.
The Fed has signaled that it will no longer allow its assets under management to fall below the current $6.5 trillion, starting in December. This move could be offset by the launch of repurchase agreement (Repo) operations. In practice, the Fed’s balance sheet stays unchanged while cash is injected into financial markets, easing liquidity concerns by adding reserves to banks.
Meanwhile, Trump has directed US Treasury Secretary Scott Bessent to prepare a stimulus campaign aimed at lower-income households for early 2026, and import tariffs may be gradually reduced to lower inflation risks. Still, fiscal conditions worsen in 2026 as the One Big Beautiful Bill Act takes effect.
Bitcoin may rebound strongly as liquidity eventually returns
By the start of the year, there should be far less uncertainty in the economic outlook, for better or worse. Currently, weaknesses are evident in the real estate and auto sectors, both of which are placing significant pressure on regional banks. Bitcoin and other riskier assets have already reacted defensively, but they stand to benefit the most once liquidity returns.
Related: Bitcoin charts flag $75K bottom, but analysts predict 40% rally before 2025 ends
Bitcoin is not hostage to US monetary policy, especially with a weakening job market. The Fed has limited room to act while fiscal conditions stay tight, leaving expansionist measures as its fallback. Over time, liquidity is expected to return to markets, helping to mitigate a sharper economic impact and creating a more favorable environment for a strong rally in scarce assets.
This article is for general information purposes and is not intended to be and should not be taken as legal or investment advice. The views, thoughts, and opinions expressed here are the author’s alone and do not necessarily reflect or represent the views and opinions of Cointelegraph.