Crypto Tanks After Fed Cut: Santiment Breaks Down The Trap

Overview

The crypto markets experienced a significant downturn following the Federal Reserve’s announcement of a third consecutive 25 basis points rate cut, which many had anticipated. While retail investors initially responded positively, the larger holders, or whales, appeared to use the moment as an opportunity to sell, leading to sharp declines in major cryptocurrencies.

What Happened?

On December 11, the Federal Open Market Committee (FOMC) confirmed another quarter-point reduction in interest rates, marking the completion of what Santiment describes as a “trifecta of cuts at the end of 2025.” This decision was made in the context of an economy described as growing at a “moderate” pace, with inflation remaining above the target. The Fed’s easing policy was justified by the balance of risks, including slowing job growth.

This reduction in rates typically signals a more favorable environment for risk assets, including cryptocurrencies, as it implies cheaper borrowing and an increase in risk-taking behavior. However, the reaction from the market was not as expected. Initially, Bitcoin rallied to a high of $94,044, while Ethereum surged to approximately $3,433. However, these gains were short-lived. Bitcoin’s price eventually fell by more than 5%, and Ethereum saw a decline of over 8.5%.

The Fed’s shift in liquidity policy played a crucial role in this market behavior. On October 29, the Fed decided to slow the reduction of its securities holdings, easing the pace of balance-sheet runoff. By December 10, it further announced that bank reserves had fallen “too much” and initiated purchases of short-term Treasury bills to maintain ample reserves. This shift indicated a move from a contracting balance sheet to a more accommodative stance, which is generally supportive of financial markets.

Despite the anticipated rate cut, market positioning was skewed. Prediction platform Polymarket indicated an overwhelming sense of optimism before the Fed’s announcement. However, on-chain data revealed substantial selling activity from whales, with one notable transaction involving the sale of approximately 100 million dollars’ worth of Bitcoin within an hour, which contributed to panic among retail investors.

As the initial enthusiasm faded, Santiment’s social data highlighted that the positive sentiment for Bitcoin had already peaked prior to the Fed’s remarks. Traders showed modest reactions to the price spike, indicating that the bullish sentiment was already waning. For Ethereum, the situation was even more pronounced, as traders who bought during the initial surge faced losses when the price fell back down.

From author

The market’s reaction to the Fed’s decision underscores the complexities of investor sentiment in the crypto space. While macroeconomic factors such as interest rate cuts generally create a favorable environment for risk assets, the behavior of different market participants can lead to unexpected outcomes. The divergence between retail and whale activity highlights the importance of understanding market dynamics and the potential for volatility.

Impact on the crypto market

• The initial positive reaction to the Fed’s rate cut was short-lived, resulting in significant price declines for major cryptocurrencies.
• Retail investors exhibited a “buy the rumor, sell the news” mentality, leading to losses as prices corrected after initial rallies.
• Whale activity demonstrated a more cautious approach, using the price surge to liquidate positions, which contributed to market panic.
• The Fed’s ongoing adjustments to liquidity suggest a potential for future growth in the crypto market, but current sentiment remains fragile.
• Historical trends indicate that cryptocurrencies may react later than traditional equities and commodities to macroeconomic shifts, suggesting a potential delayed response to favorable conditions.
• The overall crypto market cap was reported at $3.04 trillion, reflecting the impact of these dynamics on market valuation.