What's Behind the Pre-Christmas Crypto Crash? Jamie Coutts ...

Crypto markets are in turmoil, with steep declines in major assets like Bitcoin and Ethereum since Dec. 18, 2024. The downturn began immediately after the Federal Reserve’s FOMC meeting, where policymakers issued a cautious statement about monetary policy and Jerome Powell, the Fed Chair, provided remarks that spooked markets. Jamie Coutts, the Chief Crypto at Real Vision, explains how tightening liquidity and macroeconomic factors are driving the sell-off.

The Federal Reserve’s decision to lower the federal funds rate by 0.25 percentage points on Dec. 18 initially seemed like a dovish move. However, the accompanying statements painted a different picture. Powell emphasized that while inflation has eased significantly, it remains above the Fed’s 2% target. He explained that the Fed’s policy rate—now at 4.25%-4.5%—remains “meaningfully restrictive” and that future rate cuts would slow unless there was “further progress on inflation.”

Powell’s comments about the economy’s strength, combined with projections of only two additional cuts in 2025, signaled that the Fed intends to maintain tighter liquidity conditions longer than markets had hoped. This tone sharply contrasted with expectations of a more aggressive easing cycle, catching investors off guard and leading to immediate selling pressure across risk assets, including cryptocurrencies.

Jamie Coutts, in his Dec. 20 analysis on X, ties the crypto market crash to the tightening global liquidity environment, a theme he’s been discussing since early December. According to Coutts, liquidity has been contracting for two months, driven by shrinking central bank balance sheets and rising bond market volatility. These conditions are unfavorable for risk assets, which rely heavily on abundant liquidity to sustain demand.

Coutts highlights that cryptocurrencies, especially Bitcoin, are particularly sensitive to liquidity changes. Historically, Bitcoin has struggled during periods of tightening financial conditions. The Fed’s cautious messaging amplified existing concerns, leading to accelerated outflows from crypto markets. As Coutts notes, this is a delayed reaction to the liquidity tightening trend.

The crypto market’s response was swift. Within 30 minutes of Powell’s press conference, Bitcoin began to decline, and the sell-off continued over subsequent days. By Dec. 20, Bitcoin was down 7.2% over the past 24 hours, with Ethereum dropping 10.7%. Weekly losses for both assets exceeded 5% and 16%, respectively. Altcoins like Solana and Dogecoin saw even sharper declines, with weekly losses of over 16% and 26%.

Coutts’ analysis attributes this sharp downturn to the ongoing tightening of global liquidity conditions, including shrinking central bank balance sheets and reduced financial liquidity. While Coutts did not directly reference Powell’s remarks, he emphasized that these liquidity challenges have been building over the past two months, creating an environment unfavorable for risk assets like crypto.

Powell’s remarks during the press conference highlighted the balance the Fed must strike. He acknowledged the risks of reducing policy restraint too quickly, which could undermine inflation progress, versus acting too slowly, which could unnecessarily weaken economic activity. This balancing act has created uncertainty in the markets, contributing to heightened volatility.

Coutts also points to global liquidity metrics, including the U.S. Dollar Index (DXY) and global money supply (M2), as indicators of why crypto markets are struggling. A stronger dollar and reduced money supply tighten financial conditions, leaving little room for speculative assets like crypto to thrive. While global M2 may be stabilizing, Coutts warns that Bitcoin’s historical lag behind liquidity trends means further pain could lie ahead.

In summary, Jamie Coutts believes the crypto crash is due to shrinking global liquidity, caused by central banks reducing their balance sheets and the money supply (M2), which makes it harder for Bitcoin and other risk assets to thrive.

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