Over the past month, Bitcoin (BTC) has experienced a significant pullback, falling from its all-time high of $126,000 to below $90,000. This 25% decline has instilled panic in the market, driving the fear index into single digits. In the last 41 days, the crypto market has seen its market capitalization shrink by over $1.1 trillion, with average daily losses reaching as high as $27 billion. This data clearly indicates that the crypto market is currently navigating a period of intense turbulence.
The Federal Reserve's internal disagreements and pressure from external political figures are undoubtedly exacerbating this crypto storm. The fundamental reason is that, regardless of individual opinions, the Federal Reserve has become a pivotal influence on the entire crypto market. While Bitcoin operates on a decentralized network, the capital invested in it is not. Liquidity within the crypto market originates from the global U.S. dollar system, with the Fed acting as its central governing body.
The relationship between Fed policy and crypto market movements can be broadly understood as follows:
- •Rate hikes lead to a more expensive dollar, which dries up liquidity in risk assets, causing the crypto market to decline.
- •Rate cuts make the dollar cheaper, encouraging liquidity to flow back into tech and crypto assets, leading to market rebounds.
- •Balance sheet reduction (Quantitative Tightening - QT) withdraws capital, making the crypto market feel starved of oxygen.
- •Balance sheet expansion (Quantitative Easing - QE) injects capital, potentially restarting long-term bull cycles.
While these dynamics are simplified, it is crucial to remember that behind every market movement are not just retail traders, but the fluctuations of the global cost of capital structure.
The December Crash and its Connection to Fed Policy
The significant market downturn in the latter half of 2025 has had a profound impact. Key observations from this period include:
- •Rapid liquidity contraction in Q4.
- •Clear retreat of capital from the crypto market.
- •Large venture capital firms and institutions reducing their positions.
- •Structural breakdowns in BTC and ETH prices.
- •A sharp decline in the market capitalization of stablecoins.
These developments are intrinsically linked to the Federal Reserve's monetary policy shifts since the second half of 2025. The pertinent questions are no longer whether the Fed influences the crypto market, but rather what the Fed's next moves will be and how the crypto market should adapt.
The Fed's Internal "Infighting": A Fracture in Consensus
The Federal Reserve has historically operated with a culture of presenting a unified front. Internal disputes were typically managed discreetly, with public statements reflecting a broad consensus to stabilize markets. However, this year has seen three significant anomalies disrupting this traditional approach:
1. Conflicting Economic Data Hinders Consensus
From Q3 to Q4 2025, the U.S. economy has exhibited a peculiar contradiction. Inflation has remained persistent, suggesting a need to maintain or increase interest rates. Simultaneously, the employment market has cooled rapidly with slowing hiring, which typically calls for rate cuts to prevent a severe economic downturn. This duality presents a complex challenge for the Fed, creating two opposing camps:
The hawkish camp argues:
- •Inflation remains above the target threshold.
- •Potential new tariffs could further increase prices.
- •Cutting rates now risks repeating the inflationary mistakes of the 1970s.
The dovish camp contends:
- •The labor market is experiencing a sharp cooling.
- •Declining confidence indicators suggest consumer spending may have peaked.
- •Sustained high interest rates could disproportionately harm low- and middle-income households.
Historically, the priority was "inflation first." However, with both inflation and recession risks present simultaneously, each camp believes its perspective is the correct one, making consensus difficult to achieve.
2. A Stable Bloc of Three Governors Emerges
A notable development this year is the alignment of three voting members of the Board of Governors, all nominated by the same president. Their shared perspective emphasizes a deeper focus on employment, a belief that inflation will not re-accelerate sharply, and significant concern over the structural damage caused by prolonged high interest rates. When three votes form a solid bloc, it creates a "stable minority" that can effectively resist the Chair's initiatives, transforming a minority into a significant blocking force.
3. Eroding Authority: Exposed Disputes and Political Pressure
The market's confidence in the Chair's ability to manage internal forces is being tested. This year, three unprecedented events have occurred:
- •Committee members are openly expressing divergent opinions.
- •The Chair's views no longer automatically represent the consensus.
- •The President has repeatedly and publicly criticized the Chair.
These factors are collectively weakening the Fed's institutional trust, moving beyond mere policy disagreements to a fundamental erosion of confidence. Without trust, consensus becomes unattainable.
Presidential Pressure and its Impact on Powell
The external variable of President Trump's repeated public criticism of Chair Powell, including suggestions of replacement, cannot be underestimated. While presidential criticism of the Fed is not entirely new, the current timing is exceptionally sensitive:
- •Powell's term is nearing its end.
- •The Fed is already experiencing internal divisions.
- •The December meeting represents a critical inflection point for policy.
- •The selection process for a new Chair is underway.
This confluence of factors has led to a less-discussed but significant phenomenon: the Fed is entering a "transition mindset." This mindset typically results in:
- •Reluctance to make aggressive decisions.
- •Avoidance of appearing politically influenced.
- •Weakened authority for both the current Chair and future candidates.
The Fed is currently caught in this precarious position. Furthermore, when a President publicly discusses potential candidates for the next Chair, it prompts internal reassessment within the Fed, leading to behavioral distortions. Hawks may become more hawkish to avoid appearing politically compliant, doves may emphasize the long-term legitimacy of the employment mandate, and centrists may adopt a more cautious approach to avoid misaligning themselves. This politicization of policy preferences further fractures an already fragile consensus. The earlier a December rate cut occurs, the more it risks being perceived as part of the new Chair's agenda, a burden that few would want to carry immediately before a leadership change. Consequently, as a leadership transition approaches, the inclination to maintain the status quo in policy tends to increase.
How a Divided Fed Amplifies Systemic Risk in Crypto
The emergence of significant divisions within the Fed at this critical juncture in 2025 is directly amplifying systemic risk in the crypto market. The current Fed landscape can be characterized as:
- •One faction advocating for continued tightening due to inflation fears.
- •Another faction pushing for rate cuts, concerned about economic and market contraction.
- •A middle group oscillating between recession risks and inflation concerns.
- •An overall inclination towards maintaining current policy due to the impending leadership transition.
This directional uncertainty has a more profound impact on the crypto market than might be apparent.
1. Inability to Price Future Policy Paths
While traditional finance can utilize models to estimate future interest rate paths, the crypto market lacks such a buffer mechanism. A single statement from the Fed can trigger significant price drops in Bitcoin. When different Fed officials offer conflicting views, markets lose direction, crypto liquidity diminishes, and volatility is amplified exponentially. Without anchored expectations, the most vulnerable segment of the market—altcoins—suffers first, leading to sudden flash crashes and sharp price movements that are direct reactions to collapsing expectations.
2. Unstable Policy Turns and Unclear Inflection Points
The true catalyst for a bull market is a clear shift in Fed policy from tightening to easing. However, when the Fed itself cannot reach an internal consensus on its direction, markets struggle to position themselves in advance. This leads to:
- Capital hesitation: Investors are reluctant to enter the market, causing liquidity in major cryptocurrencies to dry up. On-chain data consistently shows declining stablecoin supply and extremely low risk appetite.
- Unbalanced leverage systems: Liquidations of $100–300 million can occur rapidly. Policy uncertainty leads to a loss of directional conviction, reducing all leverage to short-term speculation and making the market increasingly fragile.
3. Increased Reliance on "Surprise Headlines"
Previously, market participants primarily monitored FOMC meetings, CPI reports, and employment data. Now, due to internal factionalism, any public remarks by a Fed official can significantly disrupt the market. This has created an unstable environment where:
- •Headlines hold more sway than on-chain fundamentals.
- •Fed speeches are more impactful than Bitcoin's technical indicators.
- •A single comment can reverse the day's market direction.
Conclusion
The Federal Reserve's control over global liquidity directly dictates the direction of the crypto market. The market downturn in 2025 has underscored the critical importance of understanding macroeconomic factors for anyone involved in crypto. Over the next six months, the Fed will remain the paramount variable influencing the entire crypto market.
SuperEx is committed to providing ongoing analysis of policy changes, on-chain data, exchange liquidity trends, and structural shifts within the crypto market. This aims to help users navigate the complexities of the macro environment and find clear direction. Stay tuned to SuperEx media for further insights.