Global Central Banks Join Forces to "Drain" Liquidity, Crypto Market Experiences Intensified "Blood Loss": Three Key Signals Worth Following

The cautious statements from the Fed and potential signals of a monetary policy shift from the Bank of Japan have jointly triggered expectations of tightening liquidity in the global financial markets, resulting in a severe blow to the crypto market. Bitcoin has significantly retreated from its peak of around $125,000 in October, once falling to around $85,000, with a single-day drop of nearly 6%, and the market fear index is in the “extreme fear” range. Meanwhile, over $637 million in long positions have been liquidated, and the altcoin season index has dropped to 25, indicating extreme weakness in market breadth. This article will delve into how central bank policies impact the crypto market through channels of funding costs and risk appetite, and explore the key signals needed for market stabilization.

Central Bank policy expectations change abruptly, becoming the trigger for the market's fall

Recently, the policy direction of the two major central banks in the world has changed, directly pouring cold water on the risk asset market. The Governor of the Bank of Japan, Kazuo Ueda, clearly stated that a meeting will be held in December to discuss a policy shift, provided that wage data supports this decision. The market interprets this as the potential end of Japan's years-long negative interest rate era, and this expectation rapidly pushed up global bond yields before the weekend, prompting funds to withdraw from high-risk assets.

Across the ocean, the remarks from Fed officials are also leaning towards a hawkish stance. Boston Fed President Susan Collins publicly expressed her “hesitant” attitude towards further easing of policies, stating that the threshold for further action is “relatively high” before more clear signs of deterioration in the labor market emerge. These strong statements sharply contrast with the market's expectations of a delayed easing cycle. The “tightening” expectations from the two major central banks have jointly pushed up the dollar exchange rate and global financing costs, directly impacting the crypto market that relies on loose Liquidity and low interest rate environments.

The sudden change in this macro environment first struck the leverage structure of derivatives in the crypto market. Rising financing costs and the convergence of the futures basis to neutral levels made it difficult for the previously supportive high-leverage long positions to sustain the upward trend. On risk-off trading days, capital outflows from certain spot ETF products further drained the liquidity that could have been used to stabilize closing prices, exacerbating the downward pressure on the market.

Market liquidity depletion, leverage liquidations trigger chain reactions

The sell-off triggered by policy expectations quickly caused a chain reaction in the fragile market structure. According to data, during this round of declines, over $637 million in long positions were forcibly liquidated in the crypto market alone. This massive liquidation itself creates selling pressure, leading to price drops, which in turn triggers more liquidations of leveraged positions, forming a vicious cycle. This is also the main technical reason for the nearly 6% plunge in a single day.

The panic sentiment in the market is intuitively reflected in the “Crypto Assets Fear and Greed Index.” After reaching a low point around 10, the index is currently still hovering around 20, remaining in the “extreme fear” range. This emotional backdrop is not only derived from Central Bank signals but also related to the typical weakening of market Liquidity towards the end of the year. Thinner trading depth means that smaller sell orders can cause larger price fluctuations, thereby amplifying the market fall.

What is even more worrisome is the deterioration of market breadth. The so-called “altcoin season index” has fallen to 25, far below the critical value that indicates the rotation of funds into small and medium-cap tokens. This suggests that the decline is not unique to Bitcoin, but a general fall across the entire market, with funds comprehensively withdrawing from higher-risk assets. From Bitcoin and Ethereum to other alts, none are spared, reflecting a systemic decline in market risk preference.

Overview of Key Market Pressure Indicators

• Bitcoin Price Retracement: From $125,000 to $85,000, a fall of about 32%.
• Market Fear Index: The Fear and Greed Index reports at 20, within the “Extreme Fear” range.
• Long positions liquidation amount: Cumulative exceeds 637 million USD.
• Altcoin Season Index: Fell to 25, indicating extremely weak market breadth.
• Main Trading Pair Depth: The order book depth for the BTC/USDT and ETH/USDT trading pairs on major CEXs has significantly thinned out.

When will the market stabilize? Focus on three key signals

The current downward trend is concerning, but the market is not without opportunities. A credible and sustainable rebound often requires multiple conditions to be met simultaneously, rather than sporadically. First, it is essential to observe the repair of the market's microstructure. For instance, the order book depth of the largest Bitcoin and Ethereum trading pairs on mainstream CEXs needs to be rebuilt during and after the U.S. trading sessions. At the same time, under moderate selling pressure, the bid-ask spreads should remain narrow rather than expand sharply.

Secondly, the materialization of capital inflows is crucial. The market needs to see the net subscription volume of spot products (such as spot ETFs) improving in tandem with the net issuance volume of stablecoins. This pairing signal indicates that fresh capital is genuinely entering the market for allocation, rather than just short covering or short-term speculation. When this positive capital flow can sustain for several trading days, the intraday rebound is more likely to solidify by the close, rather than being a fleeting occurrence.

Finally, the “noise” of macro policies needs to be reduced. Any central bank comments that continue to push up yields or strengthen the dollar could keep buying interest weak. In the absence of sufficient trading depth, even if a Relief Rally occurs, there is a risk of rapid fade, especially when the flow of funds within exchanges cannot offset the overall market's de-risking trend. Ultimately, the trend of major Crypto Assets still follows Bitcoin, and Bitcoin's movement may only need a policy headline news to test key support levels again.

In-Depth Analysis: Why are Crypto Assets so Sensitive to Central Bank Policies?

Crypto Assets, especially Bitcoin, are often promoted as “digital gold” and a “safe haven” from the traditional financial system. However, in recent years, their correlation with traditional macro-financial variables has significantly increased. The core logic behind this is that the crypto market has evolved from a niche market for geeks into a massive financial market deeply reliant on dollar Liquidity and leverage, jointly participated by global institutions and retail investors. When the Fed tightens policy and the dollar strengthens, the global financing cost of dollars rises, and arbitrage capital seeking high returns will withdraw from risk assets, including Crypto Assets, and flow back to safer dollar assets.

In addition, the crypto market, especially the derivatives market, has built up extremely high leverage. During loose periods, low financing costs encourage investors to amplify returns through borrowing. Once policy expectations shift, financing costs (such as the funding rate for perpetual contracts) can soar rapidly, eroding profits from long positions and even directly leading to liquidations. This inherent financial leverage amplifies the impact of policy signals on prices. Therefore, understanding the relationship between Central Bank policy and the crypto market is crucial, not in its “hedging” narrative, but in its real financial attributes as a “global high-risk liquidity asset.”

Operational Thinking: Seeking Opportunities and Avoiding Risks in Volatility

For investors, the current market environment is undoubtedly full of challenges. The primary principle is risk management, examining one's own leverage levels. During periods of insufficient market depth and increased volatility, high leverage is akin to “walking a tightrope,” making it easy to be swallowed by sudden waves of liquidation. Secondly, pay attention to the market stabilization signals mentioned above, such as the recovery of order book depth and the net issuance of stablecoins, as well as on-chain and market data; these are more reliable than simply guessing the price bottom.

From an asset allocation perspective, when market panic reaches its peak, one can begin to gradually pay attention to those fundamentally solid leading assets, such as Bitcoin and Ethereum. Historical data shows that making long-term allocations during periods of “extreme fear” in the market may face short-term fluctuations, but the long-term success rate is relatively high. However, one must remain patient and wait for clear signs of recovery in the microstructure of the market and macro sentiment, avoiding blindly “catching falling knives.” Finally, keeping a close eye on the policy paths of major global Central Banks has become one of the key variables determining the short-term direction of the crypto market.

The recent market fall led by global central bank policy expectations clearly reveals the increasingly close ties between the crypto market and the traditional financial system. It is no longer an isolated “lawless land”, but rather a “frontier risk asset” profoundly influenced by the tides of global dollar liquidity. For market participants, understanding this new reality is more important than ever. The future recovery path of the market will depend not only on internal technological development and adoption within the industry but also on whether the market can build a more resilient financial structure and a more rational group of participants under the new normal of “high interest rates and high volatility.” After the storm, the survivors and the eliminated in the market will be differentiated accordingly.