Fed Policy Shift May Fuel Crypto Reversal in December

The cryptocurrency market, led by Bitcoin, experienced a severe dislocation in November, starkly underperforming traditional equities. Coinbase Institutional’s report highlighted that Bitcoin fell more than three standard deviations below its 90-day average on a risk-adjusted basis. In contrast, the S&P 500 declined by only one standard deviation, underscoring the disproportionate sell-off in digital assets. This statistical extreme suggests the move was an outlier, potentially setting up for a mean reversion.

This downturn was fueled by several concurrent negative factors. Spot Bitcoin ETF flows turned “markedly negative,” with November posting record cumulative outflows. Simultaneously, the supply of stablecoins—a key source of liquidity for crypto markets—contracted at its weakest 30-day pace since 2023. Furthermore, long-term holders began distributing coins instead of accumulating, and digital asset treasury vehicles traded below their net asset value for the first time since 2024. This confluence created a perfect storm of selling pressure and liquidity withdrawal.

The core of Coinbase’s argument for a December reversal hinges on a major shift in Federal Reserve policy. “With quantitative tightening [QT] ending, the Fed is back in the bond market, and the drain of cash from markets may be behind us,” the firm stated. This cessation of QT, which removes liquidity from the financial system, is traditionally supportive for risk-on assets like cryptocurrency by improving overall market liquidity conditions.

Coinbase suggests that “sidelined cash,” such as the sizable balances in money-market funds, could pivot into regulated Bitcoin vehicles once conditions stabilize. The report also posits that “conditions could be primed for a reversal in December, as we believe the Federal Reserve could cut rates and unlock some inflows.” While the report briefly discusses concerns about a “K-shaped” economic recovery—where AI-driven corporate profits might contrast with personal income instability—it notes evidence of this impacting crypto remains weak, keeping the focus on monetary policy.

This perspective is echoed by external commentators like reformed hedge-fund manager James Lavish, who provides a broader thesis for Bitcoin’s value. Lavish states he is “bearish on the Fed and what they continue to do to the value of the dollar.” He points to the US Dollar Index (DXY), which has plummeted more than 10% this year, and argues it is “likely to tank further” when the Fed eventually resumes quantitative easing (QE).

Lavish’s analysis frames Bitcoin as a direct hedge against central bank policy, noting that over the last 16 years, the Fed has added $8.8 trillion in liquidity to markets while removing only $3.2 trillion. Signs of this shift may already be emerging. Data from the St. Louis Fed shows a recent $13.5 billion injection into the banking system via overnight repos, the second-largest spike since the COVID-19 pandemic. For analysts like Lavish, such actions undermine confidence in the dollar and strengthen the fundamental case for decentralized, scarce assets like Bitcoin.

While Coinbase Institutional acknowledges that “full market stabilization will likely take a few months,” the alignment of technical extremes, the end of quantitative tightening, potential rate cuts, and a weakening dollar narrative creates a compelling argument for a turning point. The stage appears set for December to test whether improved macroeconomic liquidity can indeed catalyze the reversal the crypto market desperately seeks.