Limited Liquidity Dampens Year-End Rally

Investors hoping that the latest Fed move would ignite a strong fed policy crypto tailwind may be disappointed as structural liquidity signals remain cautious.

The Fed decision and its limited dovish pivot

At its final FOMC meeting of the year, the Federal Reserve delivered a third consecutive rate cut, but the outcome was not as dovish as many expected. Officials remain divided over whether stubborn inflation or a weakening labour market poses the greater threat, and, as a result, they signalled little enthusiasm for additional easing.

Recent public remarks from policymakers show a committee deeply split, leaving the ultimate direction heavily dependent on how Jerome Powell chooses to steer policy. However, with Powell’s term expiring in May next year, he will oversee only three more FOMC meetings, narrowing the window for decisive shifts. Sticky price pressures and a cooling job market now create a painful trade-off reminiscent of the 1970s.

During the 1970s “stagflation” era, the central bank’s stop-start approach allowed inflation to become entrenched. That historical precedent now looms large. Moreover, it helps explain why many officials are reluctant to move too aggressively in either direction as they weigh competing risks.

Balance sheet moves: support for banks, not crypto

Within this context, two recent Fed actions deserve close scrutiny: the removal of the aggregate cap on the Standing Repo Facility (SRF), and a new round of Treasury bill purchases aimed at maintaining ample reserves in the banking system. The Fed can also buy other US Treasuries with up to three years remaining maturity if needed.

The central bank’s goal is clear. It is not trying to deliver premium liquidity to equity or digital asset markets, but to stabilise short-term bank funding and ease money market strains. The projected purchase of $40 billion in T-bills this month, combined with a looser SRF, should help steady equity indices; however, it is unlikely to generate a broad-based rally comparable to the one seen in 2021.

Powell stressed that current T-bill purchases are strictly for “reserve management”, underscoring that the primary purpose of balance sheet expansion is stability. Moreover, this language signals that the Fed is not intentionally unleashing a new liquidity wave to drive risk assets higher, including cryptocurrencies and high-beta tech stocks.

In practice, these operations are supportive for short-term funding markets and banks. That said, they do not meaningfully alter the long-term cost of capital that typically powers multi-month bull runs across speculative assets.

Rates market signals and long term rates impact

Rate traders have reacted to the meeting by scaling back previous optimism. Markets now price in only two cuts in 2026, both of 25bps, with no further easing expected until January 2028. This path leaves the projected terminal rate around 3.4%, notably higher than in the pre-pandemic era.

Bond market pricing tells an even clearer story. Since late October, yields on Treasuries maturing in under three years have fallen, but the 10-year yield remains stuck above 4.1%, and longer-dated T-bond yields have risen substantially. Therefore, long-term financing costs stay elevated, implying that riskier markets will face a persistent liquidity drought.

For equities, this mix favours large-cap names with robust balance sheets over speculative growth. For digital assets, it means that any sustainable rally needs genuine, long-duration capital rather than temporary, policy-driven bursts of enthusiasm.

Smart money positioning in the crypto options market

Derivatives data underline this cautious stance. In the crypto options market sentiment, traders remain structurally bearish on BTC and ETH, and that view has hardened since the FOMC. Bullish activity is mostly concentrated in ultra-short-dated 0DTE contracts, highlighting a preference for intraday speculation rather than long-term exposure.

The far-month bullish skew that previously supported ETH has now disappeared, with positioning shifting to a neutral-to-bearish regime. Moreover, this pattern indicates that professional traders see ETH’s sharp rebounds as driven primarily by speculative flows, not by improving fundamentals or a durable growth story.

ETH’s implied forward yield is just 3.51%, versus roughly 4.85% for BTC. From an institutional investor’s perspective, these returns look unattractive compared with risk-free or near risk-free alternatives. That said, BTC still holds a relative edge over ETH and is often seen, at best, as a “hold” rather than a high-conviction buy.

Why fed policy crypto dynamics still favour other assets

The Fed’s renewed balance sheet expansion objectively benefits the stock market, while simultaneously weakening the US dollar and underpinning a sustained long-term rise in gold and silver. The euro also stands to gain from these flows. However, aside from a few large-cap tokens such as Bitcoin, the broader crypto market struggles to keep pace.

Crypto still trades like a dollar-denominated, offshore, equity-like market that competes directly with precious metals and stock indices for risk capital. In a world of elevated long-term yields and fragile sentiment, many investors have limited appetite for that additional volatility. Therefore, for more conservative portfolios, a reduced allocation to digital assets can be a rational choice.

Trading implications and crypto risk management strategies

For digital assets, the Fed’s stance is far from ideal. Sustained, large-scale rallies typically require a powerful influx of long-term liquidity, not just marginal adjustments in money markets. Moreover, elevated long-term rates will keep strategic investors cautious, leaving price discovery increasingly dominated by leveraged speculators.

This environment suggests that short-term rebounds will coexist with entrenched long-term bearish expectations. For assets where traditional institutional pricing power is strong, such as BTC, XRP, and SOL, those longer-term doubts will likely continue to suppress valuations. However, in segments where institutional influence is weaker, including ETH and many altcoins, leverage-driven short squeezes may still drive dramatic but temporary rallies.

Given this backdrop, incorporating far-month put protection on crypto holdings remains a prudent element of crypto risk management strategies. Yet the cost of hedging has risen. Yields generated by common crypto carry trades can no longer reliably cover the ongoing cash outlay required to maintain long-dated downside protection.

Using equities and FX as hedges

One potential solution is to lean on assets that remain in a solid uptrend, such as the so-called Mag 7 group of mega-cap US tech stocks. Investors can use gains from these names to fund option “insurance premiums” on crypto. Moreover, the Mag 7’s beta is typically lower than that of BTC and ETH, so when equities climb, their upside may comfortably offset hedging costs.

If markets fall instead, the higher sensitivity of digital assets means that far-month crypto puts can generate outsized returns relative to equity losses. This asymmetry makes them an attractive portfolio hedge. That said, investors must still size positions carefully to avoid over-hedging or forced selling during volatility spikes.

Considering the risk of USD depreciation, holding euros as a cash reserve also looks increasingly sensible. With the Fed still in a cutting cycle, the euro’s long-term outlook appears constructive, particularly if US real yields drift lower.

At the same time, European inflation is showing tentative signs of a mild rebound. As a result, the European Central Bank is more likely to hold rates steady rather than cut aggressively, while the Bank of Japan may intervene to sell USD in an effort to support the yen and curb imported inflation. Together, these forces significantly raise the odds of near-term euro appreciation and strengthen its role as a potential euro usd hedge.

Concrete structures for cautious crypto exposure

With BTC’s implied forward yield now almost indistinguishable from T-bond yields, simply holding coins offers little clear advantage over Treasuries. However, investors who must maintain some long exposure can consider more structured approaches that manage downside while preserving upside.

One approach is a risk-reversal structure, funded from prior trading profits. Here, an investor sells a put and buys a call with the closest absolute delta, in both cases selecting expiries around 30–60 days. Moreover, this strategy should be accompanied by a meaningful cash buffer to absorb adverse moves and margin calls.

If prices rise substantially and the investor realises satisfactory gains, the position can be rolled into a new structure at higher strikes. Conversely, if price action remains muted, there is still an opportunity to capture value from the significant negative skew between the sold put and purchased call as expiry approaches, before rolling over again.

Should the market correct sharply, the cash collateral set aside can be used to accumulate the underlying crypto asset at more attractive levels. That said, this approach requires discipline, as averaging down into illiquid altcoins can be far riskier than deploying capital into BTC or ETH.

T-bill market effect, gold, and alternative safe havens

The Fed’s renewed presence in the T-bill market naturally improves demand for short-dated government paper. This t bill market effect supports money market funds and bank reserves, but it also indirectly nudges investors to look further out the risk curve. However, with long-term yields still elevated, many prefer gold, silver, or high-quality equities over volatile cryptocurrencies.

Meanwhile, the perceived federal reserve crypto impact remains moderate. Balance sheet expansion is largely sterilised within the banking system, and higher-for-longer yields enhance the appeal of traditional fixed income. Moreover, without clear evidence of renewed bitcoin institutional demand outlook improvement, digital assets will struggle to attract large-scale, sticky capital.

Outlook: survival over chasing a rally

In summary, the latest rate cut and liquidity measures have not fundamentally changed the crypto landscape. Any sharp, speculative rally that lacks underlying fundamental support should be treated as a risk event rather than a straightforward opportunity. Structural liquidity and positioning still argue for caution.

For investors navigating this uncertain festive period, closely watching leverage metrics such as open interest and funding rates is essential. Moreover, tightening risk limits, using selective hedges, and maintaining diversified reserves in assets like euros and high-quality equities may be the most effective way to protect capital.

Ultimately, adopting a defensive stance is advisable. In this market, survival and disciplined positioning matter far more than betting on a late-year “Santa rally” that the current policy backdrop is unlikely to deliver.