When seeing this title, I guess some of my friends will laugh at me, while others will probably laugh at me in their hearts but not say it out loud.
After all, it is almost 2025, which is the big bull market cycle that happens every four years. In particular, the altcoins led by ETH showed a rebound trend in the past two days.
The main motivation for writing this article is to explore this.
➤ Medium-term factors: interest rate cuts and inflation
The rule of a bull market every four years has existed from 2013 to 2015, and this is the fourth round. This rule will still exist overall.
But is it too easy to buy before 2025 and wait for a big bull run to sell? Will the details change?
Especially after the approval of ETFs, the participants in this market have changed; will the market psychology and behavior still be exactly the same as before?
The most fundamental difference is that it has become more sensitive to macro factors. So I'll start with the macro factors, which is also the main reason why Bee Brother cleared out altcoins.
❚ 2025 rate cut forecast.
I had been reducing my altcoin holdings, and once the dot plot was released on December 19, I started to clear out altcoins. Because the dot plot shows that Federal Reserve officials are likely predicting only a 50 basis point rate cut in 2025.
According to this prediction, there may be at most two rate cuts next year. If they first keep the interest rates unchanged and then cut them, it would mean two cuts in November and December.
Regarding the halt of balance sheet reduction, the conclusion analyzed in Teacher @VV_watch's previous article is that the worst-case scenario still needs 10 months.
This coincides well with the dot plot's prediction; this is probably not a coincidence. The Federal Reserve should have predicted the interest rates based on inflation expectations.
Of course, this is the worst-case scenario. The specific interest rate policy still needs to be observed based on subsequent non-farm payroll and inflation data.
❚ 2025 rate cut expectations.
There are many situations where actual interest rate policies are inconsistent with dot plot predictions.
Especially after Trump took office, he is likely to pressure the Federal Reserve to urge it to cut rates.
Although Powell was nominated by Trump, he publicly criticized the Federal Reserve multiple times during his previous term, complaining that the rates maintained by the Federal Reserve were too high. According to some media articles, he had even 'personally attacked and insulted Powell' and questioned whether he could dismiss Powell.
So, Trump is likely to pressure the Federal Reserve to request a rate cut.
Currently, market expectations are that there will be more than two rate cuts in 2025. However, this may reflect the expectations of the cryptocurrency market. It’s important to note that the cryptocurrency market consists of optimistic and speculative individuals.
Generally speaking, the Federal Reserve has eight FOMC meetings each year.
• Worst-case scenario: If only two rate cuts are predicted, the rate cuts will start again in October.
• Average scenario: According to the average of 8 and 2, that would mean 5 rate cuts, which would also require until June to cut rates again.
• Better scenario: It may only be 4 to 6 times. Even if there are six rate cuts, the earliest would be to cut rates again in April 2025.
• Best-case scenario: It is impossible to cut rates in January; the best-case scenario would be to cut rates again in March.
❚ The game between the Federal Reserve and Trump.
In the United States, the Federal Reserve, as the central bank, is responsible for managing monetary policy, while the U.S. government is responsible for fiscal policy. Although they collaborate, they are independent of each other.
The U.S. president has the authority to nominate the chair and board members of the Federal Reserve, but cannot appoint them.
• Dismiss Powell? As for dismissal, although under Trump's pressure, the SEC chair just resigned, dismissing Powell may be different.
First, the SEC belongs to the government and has a more direct relationship with the president. However, the Federal Reserve is an independent entity, and there is controversy over whether a president can legally dismiss the Federal Reserve chair. The Federal Reserve chair is also a member of the Federal Reserve Board and a fixed voting member of the FOMC. While the president can attempt to dismiss them under sufficient reason, there is no historical precedent for this.
Second, there are 5 SEC commissioners, while there are 12 voting members of the FOMC. Dismissing just one chair may not have a significant impact.
Third, the most crucial point is that I don’t believe a new Federal Reserve chair would fully comply with Trump. Currently, the motivations of the Federal Reserve and the U.S. government are somewhat opposed.
A major contradiction in the current U.S. economy is between recession and inflation. For the U.S. government, resolving the recession is more important because it can alleviate economic downturns. Recently, expectations of economic recession are gradually fading.
However, for the Federal Reserve, addressing inflation is more important, especially since this round of inflation is mainly caused by excessive monetary issuance.
• Expected inflation rebound. However, after the rate cut in September this year, the inflation rate had a slight rebound. Moreover, Trump's policies may raise inflation.
In fact, an inflation rate of 2.4% has basically returned to normal levels. However, a series of Trump's policies carry the potential to push up inflation, which is fundamentally why the Federal Reserve has significantly lowered its rate cut expectations.
First, one of the core ideas of Trump's 'Make America Great Again' policy is to protect domestic industries and jobs, with specific policies being to raise tariff barriers and strictly control immigration (including illegal labor influx) to ensure the sales of domestic products and employment.
However, domestic production costs and labor prices are higher than those of similar goods imported from some developing countries, and higher than the wages of illegal workers. This will lead to an increase in U.S. prices, which may exacerbate inflation in the U.S.
Second, Trump promotes tax cuts, reducing tax burdens for companies and consumers. This is beneficial for corporate investment and consumption but is an unfavorable factor for inflation.
Third, during his campaign, Trump promised that his policies would 'lower high borrowing costs and ease the economic burden on American families.' This contradicts the Federal Reserve's planning of slowing rate cuts and continuing to reduce the balance sheet.
Therefore, after Trump took office, if he continues to cut rates, there may be a rebound in inflation. So even if Powell is replaced, the new Federal Reserve chair may not immediately continue to cut rates.
❚ Summary.
The macro impact may not be very sensitive to cryptocurrency market investors, but traditional investors may feel it more. On the day the Federal Reserve dot plot was released, December 19, there was a net outflow of $680 million from ETFs, the largest net outflow since the ETF's inception.
Subsequently, there was a net outflow from the BTC ETF for three consecutive days.
Meanwhile, Teacher Mo Fei @Murphychen888's on-chain data analysis also shows that large holders on the chain are reducing their BTC holdings.
➤ Short-term factors: Christmas disaster and the curse of December decline.
If the macro environment shows medium-term bearish signals, then in the short term, especially in December during Christmas, there is a certain probability of decline. There is also a pun in the market called 'Christmas disaster.'
❚ Clearing accounts.
The decline in December may be due to companies clearing accounts at the end of the year.
American companies generally settle accounts in January of the following year based on the previous year's annual financial status. Of course, there are some special cases, but most are calculated on a natural year basis for financial reporting.
At the time of settlement, all temporary accounts must be zero. The process of transferring funds from temporary accounts to permanent accounts is called clearing accounts. In simple terms, it means dealing with some temporary and transitional accounts.
Clearing accounts is a routine action in daily financial activities. However, clearing accounts before year-end settlement is more important.
Therefore, in the clearing accounts in December, we can broadly interpret 'clearing accounts' as a series of legal and compliant asset adjustment actions undertaken by companies to make their financial reports look better.
To put it more bluntly, it involves selling off some underperforming assets to make the company's annual report look good. (Of course, this must be within the legal and regulatory limits).
❚ Christmas.
After Christmas, there is also a certain probability of decline in U.S. stocks.
I gathered some data from after Christmas since 2013. BTC and ETH actually performed well, but the probability of decline in U.S. stocks after Christmas is relatively high, especially for the Russell 2000 small-cap index (which has been used as a benchmark for altcoins in recent years). From December 27 to 31, the probabilities of an increase were 44.44%, 22.22%, 55.56%, 11.11%, and 37.5%, respectively.
➤ Other factors.
❚ Japan.
A rate hike in Japan is also a bearish factor, and whether Japan will raise rates in January is currently uncertain.
❚ U.S. debt ceiling.
In June 2023, the U.S. debt ceiling was suspended, and this suspension will expire on January 1, 2025.
After expiration, will the ceiling be determined based on the actual debt level at that time? Or will a new ceiling be negotiated?
On December 16, 2021, the debt ceiling was raised by $2.5 trillion, reaching a limit of $31.381463 trillion. On that day, the NASDAQ fell by 2.61%, and BTC fell by 2.54%.
➤ Final remarks.
First, Trump's policy direction may push up inflation, so the Federal Reserve may temporarily stop lowering interest rates for a period of time. The balance sheet reduction is still ongoing, which means the dollar is in a tightening environment. Other countries worldwide may follow the U.S. monetary policy, which is an unfavorable factor for the speculative market.
Trump may pressure the Federal Reserve again to request a rate cut, but this also requires a process of negotiation between both sides. The Federal Reserve is unlikely to cut rates quickly; the dot plot on December 19 shows two rate cuts in 2025. Even if there are six rate cuts, it won't start again until April.
On the other hand, there may be a lag from the implementation of Trump's policies to the improvement of the real economy and the promotion of U.S. stock prices.
Secondly, considering the possibility of a downturn after Christmas.
Again, whether Japan will start raising interest rates in January, and how the U.S. debt ceiling will be after January 1, 2025, are uncertain.
Based on this analysis, I personally feel that the short-term market is still unstable, and the possibility of a black swan cannot be ruled out. At least for the remaining days in late December, I am not very optimistic.
Bee Brother's thought is that altcoin season and the main upward trend require macro-level liquidity easing for new funds and traders to join.
Although BTC has risen significantly currently, the growth of BTC mainly comes from the ETF market. The funds in the ETF market cannot spill over to altcoins.
So on December 19, I chose to clear out altcoins (actually not completely cleared, I kept some base assets, and there are two other coins with pending orders that received a bit).