Bitcoin surged past $86,800 on Wednesday, climbing nearly 5%. Investors reacted to signals of looser financial conditions from the Federal Reserve and growing expectations of a liquidity-driven rally.
Fed Slows Balance Sheet Reduction
The Federal Reserve announced it would slow the pace of reducing its $6.8 trillion balance sheet. The runoff of Treasury securities will be capped at $5 billion per month, down from $25 billion. This move aims to avoid disruptions in funding markets amid ongoing debt ceiling tensions.
Interest Rates Left Unchanged
The Fed also decided to leave interest rates unchanged in the 4.25% to 4.5% range. Despite concerns about persistent inflation, the central bank maintained its projection for two rate cuts later this year.
Easing Financial Conditions Fuel Risk Appetite
Easier financial conditions are boosting risk appetite. The U.S. dollar has posted its third-largest three-day decline since 2015. Meanwhile, Treasury yields and bond market volatility have sharply fallen.
Bitcoin Rally Potential
Jamie Coutts, Chief Crypto Analyst at Real Vision, said these shifts could set the stage for a significant Bitcoin rally. “Historically, these signals have often preceded large Bitcoin moves,” Coutts said. He added that with the People’s Bank of China increasing liquidity measures, the market may be underestimating how quickly Bitcoin could surge—potentially hitting new all-time highs before Q2, despite concerns over Trump tariffs and a potential recession.
Global Liquidity Measures Supporting Risk Assets
The People’s Bank of China has injected additional liquidity into its financial system. This supports a global easing trend, which could benefit risk assets. The Fed’s move to slow its quantitative tightening also aligns with expectations that tightening cycles may be nearing their end.
Crypto Gains Amid Broader Market Rally
Crypto traders have capitalized on these developments, driving Bitcoin higher. This rally coincides with gains in equities and tech stocks. Ethereum also climbed, rising 3.2% to $2,209, according to CoinGecko data.
Uncertainties Persist
Despite the rally, uncertainties remain. Inflation, geopolitical risks, and shifts in fiscal policy under President Trump could alter the Fed’s trajectory. For now, traders are betting that liquidity will remain ample, even though earlier observations suggested otherwise.
