Bitcoin Faces Challenges Ahead of FOMC Meeting

As Bitcoin approaches the Federal Open Market Committee (FOMC) meeting week, signs of vulnerability emerge. Market conditions such as weak liquidity, uncertain rate-cut expectations, and miner stress signal potential volatility. With traders weighing the likelihood of a rate cut and a notable shift in global liquidity, Bitcoin's future could be more uncertain than it seems.

Key Takeaways

There is an 87.2% chance of a rate cut to 3.50%-3.75%.
Previous FOMC meetings have shown similar market patterns, leading to caution among traders.
Bitcoin exchange reserves have decreased, indicating weaker demand.
The Reserve Bank of India now has a strong correlation with Bitcoin's price.
Miner stress and negative NUPL among short-term holders suggest a potential bottom for Bitcoin.

Bitcoin faces challenges ahead of FOMC meeting

Bitcoin's Fragile State Ahead of FOMC Week

Bitcoin is entering the key FOMC week with an outlook that seems quite fragile. The cryptocurrency market is grappling with weak liquidity, mixed expectations regarding interest rate cuts, and a surprising new macro factor that has turned out to be one of Bitcoin’s most influential correlations. To complicate matters further, Bitcoin miners are facing pressure, and the latest data points suggest that the market may be closer to a critical turning point than it appears.

FOMC Week Predictions

Current market odds are leaning heavily towards a rate cut, with an 87.2% probability of a decrease to between 3.50% and 3.75%. Conversely, only 12.8% of traders anticipate no changes.

FOMC Week Predictions

However, the experience from the last two rate cuts serves as a reminder for caution. In the months leading up to the decisions in September and October, Bitcoin experienced minor pre-FOMC rallies, a brief uptick following the announcements, followed by subsequent declines. This time, the setup appears to mirror those experiences.

Current Market Conditions

Exchange reserves for Bitcoin have dropped from approximately 2.95 million BTC in August to about 2.76 million BTC currently, signaling a decrease in spot demand.

Current Market Conditions

Additionally, funding rates have turned negative at times amidst shaky leverage conditions. Market volatility could ramp up this week, especially with significant U.S. economic data expected before the Fed’s announcement.

According to Matt Mena, a Crypto Research Strategist at 21Shares, “The data shows inflation remains stable and is not reaccelerating — precisely the backdrop markets need to maintain confidence in continued Fed easing.”

Broader Economic Context

Meanwhile, global central bank liquidity has remained largely unchanged since 2022, often fluctuating between $28 trillion and $30 trillion. Historically, this range has kept Bitcoin in a slow accumulation phase rather than enabling breakout rallies.

Broader Economic Context

Interestingly, the latest data shows that when liquidity turns negative, it becomes a prime opportunity for long-term Bitcoin accumulation.

Liquidity Trends

One noteworthy development is that the Reserve Bank of India now exhibits the strongest correlation with Bitcoin prices among major central banks. This indicates that Bitcoin's price is increasingly affected by global liquidity shifts beyond just the U.S. monetary policy.

Mena pointed out that “with over $10 trillion parked in money-market funds and fixed-income ETFs, declining yields make these vehicles structurally less attractive and increase the likelihood of a rotation into risk assets — historically a powerful tailwind for Bitcoin.”

The Current Mix of Factors

The Hash Ribbon indicator has recently turned bearish, which occurs when miner revenues decline and less efficient miners begin to shut down their operations. Additionally, the Short-Term Holder Net Unrealized Profit/Loss (NUPL) has fallen into negative territory, indicating distress among recent buyers.

Current Mix of Factors

The STH NUPL dropped from about +0.05 in September to around -0.15 in November, marking one of its most considerable declines since 2022. This combination of miner stress and panic among short-term holders often coincides with significant Bitcoin price lows, even if volatility persists in the short term.

Conclusion

As Bitcoin navigates through these challenging conditions leading up to the FOMC meeting, traders and investors should remain vigilant. The interplay between macroeconomic conditions and Bitcoin's unique market dynamics will be critical in determining the next steps for this leading cryptocurrency.