Federal Reserve halts QT, market anticipates QE: Interpreting the true impact of liquidity policies on the crypto market

By the end of 2024, the Federal Reserve halts its quantitative tightening (QT) policy, and the market once erupts in euphoria. Crypto assets respond accordingly, with Bitcoin (BTC) rebounding above $93,000 after the announcement, Ethereum (ETH) surging past $3,000, and competitors like Sui and Solana experiencing double-digit gains. However, can this short-term rebound translate into a new upward trend? Or is it merely a fleeting glow in a bear market? To answer this question, we need to look back at history and understand a simple yet often overlooked truth: the true driver of the crypto market’s momentum may never have been the end of QT, but rather the beginning of QE.

The Illusion of QT Ending: Why Short-Term Market Rebounds Are Unsustainable

On December 1, 2024, the Federal Open Market Committee (FOMC) officially announced the cessation of QT. This news triggered a collective market frenzy — not only Bitcoin and Ethereum rose, but even lesser-known altcoins participated. Yet, behind this optimism lies a phenomenon worth cautioning against: market misinterpretation of the end of QT.

In essence, ending QT is a “stop-the-bleeding” policy, meaning the Fed ceases shrinking its balance sheet, but this does not imply new liquidity is being injected. In other words, shifting from tightening to stabilization is not equivalent to easing. Crypto market participants tend to over-interpret positive signals from policy shifts, leading to short-term speculation. However, such speculation lacks fundamental support and is destined to falter.

Lessons from History: The Crypto Market Post-QT in 2019

Six years ago, on August 1, 2019, the Fed paused QT once again. The scenario then was eerily similar to today’s, yet it ultimately led to a different outcome.

In the first half of 2019, the crypto market experienced a mini bull run. Bitcoin rebounded from its late-2018 lows to $13,970, with market expectations of new highs. After the Fed announced the end of QT on July 31, Bitcoin indeed rose about 6% in the short term, even returning above $12,000 within days. But disappointingly, this upward momentum did not last. By September 26, the crypto market faced a new crash, with Bitcoin falling to $7,800 — nearly 40% below its high.

Throughout the second half of 2019 and early 2020, the crypto market remained under the shadow of a bear trend. Even a brief rally in October driven by “China blockchain policy favorable news” was short-lived, with the overall trend downward. It was only after March 15, 2020, when the Fed announced “unlimited QE,” that crypto truly started to follow the stock market’s upward trajectory. The March crash then became one of the greatest investment opportunities in history.

This history clearly shows that the end of QT is often an overinterpreted positive signal; the real catalyst for market turning points is the initiation of QE.

Current Analysis: Diminishing Marginal Effects of Liquidity Policies After 10x Scale Expansion

On the surface, today’s situation bears many similarities to 2019. After Bitcoin hit a record high of $126,080 in October, it experienced a sharp correction of over 36%, entering a phase of volatility. Yet, deeper analysis reveals fundamental changes in the crypto landscape.

Market Size and Institutionalization

Compared to 2019, the total market cap of crypto has expanded nearly 10 times. The era of retail dominance is over; institutional capital has flooded in, making crypto assets more akin to risk assets in traditional finance. This has directly increased the correlation between crypto and US stocks. Currently, Bitcoin’s correlation with the S&P 500 remains between 0.4 and 0.6, indicating a strong relationship. In 2019, this correlation ranged from -0.4 to 0.2, with almost no correlation or even negative.

The Double-Edged Sword of Stability

From a candlestick perspective, Bitcoin’s price movements over the past two years are more stable than during 2017-2019, with fewer extreme surges and crashes. This stability, in the context of increased scale and institutional participation, signals market maturity. However, from another angle, this stabilization also means that crypto assets have lost some of their previous independent upward momentum. They now tend to follow macro trends, similar to tech stocks in the broader stock market, rather than moving cyclically on their own.

Before the Fed’s December 2 announcement ending QT, the Nasdaq had already begun a recovery, approaching its previous high of 24,019 points. Meanwhile, Bitcoin’s performance lagged behind, with deeper corrections and weaker rebounds. This clearly indicates that the crypto market has become a “follower,” with the US stock market acting as the “leader.”

True Salvation Comes from QE: The Subtle Game of Market Expectations and Federal Reserve Policies

Since crypto markets are now highly correlated with US stocks, their future trajectory will depend more on macro liquidity changes. This suggests that ending QT — a “stop-the-bleeding” policy — may not be enough to shift market expectations. What markets truly crave is “blood transfusion”: the initiation of QE and the liquidity injection it entails.

Institutional Expectations: 2026 as a Key Turning Point

Currently, major financial institutions like Goldman Sachs, Bank of America, and Deutsche Bank generally expect the Fed to continue cutting rates until 2026. Some even predict two rate cuts in 2026. More aggressively, Deutsche Bank believes the Fed might restart QE as early as the first quarter of 2026.

These expectations undoubtedly give the crypto market some room for imagination. However, Goldman Sachs recently dampened optimism with a report titled “2026 Global Market Outlook,” stating that “the baseline scenario for 2026 is moderate, markets have priced in expectations, and risks of disappointment should be watched.” This implies that current market pricing for QE may be overly optimistic, and actual policy easing might fall short of market expectations.

The New Dilemma for Crypto in the AI Era: No Longer the Main Stage

Beyond macro policy variables, crypto faces an even bigger challenge: it is no longer the most dazzling focus of the market.

The Rise of AI Markets Suppresses Crypto Attention

In 2024, the explosive growth of generative AI has diverted investor attention and capital. This is most evident in the shift of crypto mining companies. Data shows that among the top ten mining firms by hash rate, seven have reported actual revenue from AI or high-performance computing projects, with the remaining three planning to develop related businesses. This is not just diversification but a clear recognition of industry trends — rather than fighting in the red ocean of crypto, it’s better to ride the AI wave.

Changing Market Recognition

In 2019, news like Facebook’s Libra project or Bakkt’s launch of physically settled Bitcoin futures could trigger significant market reactions. Today, similar news rarely stirs strong responses. Corporate adoption of crypto assets for treasury management or the listing of crypto ETFs, once sensational, have become routine.

This “desensitization” may seem to indicate institutionalization and maturity, but it actually reveals a deeper issue: crypto markets are no longer the narrative’s core. They are gradually becoming a marginal asset class within traditional finance.

Outlook: Cautiously Optimistic with Deep Reflection

Combining historical experience and current realities, we can draw several conclusions. First, the end of QT itself is insufficient to trigger a new crypto bull market; what markets truly need is the start of QE and the liquidity it brings. Second, even if QE is eventually launched, the now 10x larger and more stable crypto market may not replicate the past myth of tenfold gains with each cycle.

Finally, we must face a harsh reality: in the context of the AI era, the narrative power of cryptocurrencies and blockchain industries has weakened. Future crypto markets will not be driven solely by policy changes like in 2019 but will depend on macro liquidity, dispersed market focus, and intensified industry competition.

Over-optimism and pessimism are both inappropriate. Rationality and patience may be the best tools to navigate through this fog.