Why did Bitcoin rise today? Liquidity turned positive, and the Federal Reserve's balance sheet reduction has paused.

Why did Bitcoin rise today? The price of Bitcoin is temporarily reported around $92,290, showing a slight rebound from overnight sluggishness. The Federal Reserve's balance sheet constraints and potential repurchase operations indicate that liquidity conditions are improving, which could boost Bitcoin and other risk assets. The Federal Reserve has signaled that starting in December, it will no longer allow its managed asset size to fall below the current $6.5 trillion, a move that could be offset by repurchase agreement operations, effectively injecting funds into the financial markets.

The Federal Reserve (FED) liquidity policy shift becomes a key driver

(Source: The Federal Reserve (FED))

(Source: Trading View)

The core reason for today's Bitcoin pump lies in the key turning point of the Federal Reserve's liquidity policy. The Federal Reserve has signaled that starting in December, it will no longer allow its managed asset size to fall below the current $6.5 trillion. This move could be offset by repo operations. In fact, the Federal Reserve's balance sheet remains unchanged while injecting funds into the financial markets, alleviating liquidity concerns by increasing bank reserves.

This policy shift is of significant importance. Under the quantitative tightening (QT) policy that began in 2022, The Federal Reserve (FED) has been continuously reducing its balance sheet from a peak of nearly $9 trillion to the current $6.5 trillion. This ongoing withdrawal of liquidity has put pressure on risk assets, and Bitcoin is no exception. When the Federal Reserve announced a pause in further balance sheet reduction, it sent a clear signal of a shift in liquidity policy.

The technical details of repurchase operations are worth paying attention to. The repurchase protocol is a mechanism by which The Federal Reserve (FED) provides short-term liquidity to financial institutions through the purchase of securities with an agreement to sell them back in the future. Although this operation does not directly expand the balance sheet, it can effectively increase the available funds in the market. In comparison to risk assets like Bitcoin, more market liquidity means that more abundant funds may flow into the cryptocurrency market.

Historical data shows that Bitcoin has a negative correlation with the US Dollar Index (DXY). US import tariffs help to reduce the government's monthly deficit, while the Federal Reserve's balance sheet continues to shrink, leading to a stronger dollar against a basket of major currencies. However, once the Federal Reserve stops tapering and begins repurchase operations, the dollar may weaken, creating a favorable environment for Bitcoin's rise today.

Market Divergence Before December Interest Rate Decision

(Source: CME Fed Watch)

Before the Federal Reserve announces its interest rate decision on December 10, the broader cryptocurrency market may still face pressure. There is still significant divergence in market expectations regarding the direction of monetary policy, with concerns about inflation on one hand and signs of slowing economic activity on the other. According to the implied yields in the government bond market, traders are divided on whether to cut rates by 0.25% or keep the rate unchanged at 4%.

Cautious members of the Federal Reserve believe that President Trump's tariff policies have intensified inflationary pressures and reduced the room for interest rate cuts and support for economic growth. Meanwhile, BlackRock's report shows that there are clear signs of cooling in the U.S. job market. Federal Reserve officials often mention the stickiness of inflation. Federal Reserve Governor Christopher Waller stated on Monday: “I am concerned that tightening monetary policy is putting pressure on the economy, particularly worried about its impact on low- and middle-income consumers.”

This policy divergence explains the limited extent of Bitcoin's rise today. Although the improvement in liquidity provided upward momentum, the uncertainty surrounding the December interest rate decision has suppressed a larger-scale rebound. The CME FedWatch tool shows that the market's bets on rate cuts and maintaining interest rates are almost fifty-fifty, and this high level of uncertainty typically suppresses the performance of risk assets.

The Federal Reserve (FED) Policy Dilemma

Inflation Pressure: Trump's tariff policy has driven up the prices of imported goods, limiting the space for interest rate cuts.

Economic Slowdown: The job market is cooling, the real estate and automotive industries are weak, requiring support from loose policy.

Fiscal Deficit: The contradiction between government spending expansion and tax reduction intensifies.

Waller dismissed rumors that the government shutdown would lead to a lack of official data affecting the transparency of The Federal Reserve (FED) policies. However, concerns about data quality have indeed increased the difficulty of policy-making. In this environment, the answer to why Bitcoin is rising today partly lies in the market betting that the FED will ultimately choose to support economic growth rather than overly focus on inflation.

Weak macroeconomic conditions are not solely due to The Federal Reserve (FED)

However, attributing the weakness of Bitcoin solely to The Federal Reserve (FED) seems inaccurate, as the downtrend of Bitcoin began in early October. It is nearly impossible to accurately pinpoint the exact reasons behind Bitcoin's weakness since it hit an all-time high on October 6. According to a report from Savvy Wealth, the financial environment has worsened due to slowing shipping activity, a softening real estate market, and tightening corporate cash flow. Therefore, the decline in Bitcoin may stem more from general risk-off sentiment.

The weak performance of the real estate and automotive industries is evident, with both sectors putting immense pressure on regional banks. The real estate market is facing a double whammy of high interest rates and weak demand, leading to stagnant or even declining home prices in certain areas. The automotive industry, on the other hand, is impacted by a decline in consumer purchasing power and rising financing costs, resulting in persistently low sales.

The challenges faced by these industries are transmitted through regional banks to the broader financial system. Regional banks are highly exposed to commercial real estate loans and auto loans, and the deterioration in asset quality has led banks to tighten credit standards, creating a negative cycle. In this environment, investors will naturally reduce their allocation to high-risk assets such as Bitcoin.

The rise in Bitcoin today is also related to the marginal easing of these macro pressures. Trump has instructed U.S. Treasury Secretary Steven Mnuchin to prepare a stimulus plan targeting low-income families, aimed for implementation in early 2026. Additionally, import tariffs may be gradually lowered to reduce inflation risks. These potential policy adjustments have injected optimism into the market, supporting today's Rebound.

Optimistic Outlook for Liquidity Recovery in 2026

(Source: ING)

As liquidity eventually recovers, Bitcoin may experience a strong Rebound. By the beginning of the year, the uncertainty in the economic outlook should be significantly reduced, whether good or bad. Bitcoin and other high-risk assets have already shown defensive reactions, but once liquidity recovers, they are expected to be the biggest beneficiaries.

Bitcoin is not subject to U.S. monetary policy, especially in the context of a weak labor market. With fiscal conditions still tight, the Federal Reserve (FED) has limited room for action, and expansionary measures can only serve as an alternative. As time goes on, market liquidity is expected to recover, which will help mitigate the economic impact and create a more favorable environment for a strong rise in scarce assets.

The percentage of GDP occupied by money market funds indicates that there is currently a large amount of capital waiting to be deployed in the market. These funds may quickly flow into risk assets once the uncertainty dissipates. Bitcoin, as a scarce asset, often performs exceptionally well in an environment of abundant liquidity. The bull market from 2020 to 2021 occurred against the backdrop of massive liquidity injections by The Federal Reserve (FED).

The Three Layers of Logic Behind Today's Bitcoin Surge

Short-term: The Federal Reserve (FED) pauses balance sheet reduction to ease liquidity pressure and provide rebound momentum.

Medium-term: Expectations for Trump’s stimulus plan and tariff adjustments improve the macro environment.

Long-term: The comprehensive recovery of liquidity in 2026 will drive a strong pump in scarce assets.

However, with the implementation of the One Big Beautiful Bill Act, the fiscal situation in 2026 will further deteriorate. This means that the government deficit may widen, requiring more debt financing. Historically, an expanding fiscal deficit is often accompanied by monetary easing policies, as The Federal Reserve (FED) needs to align with the financing needs of the Treasury. This coordination of fiscal and monetary policies will ultimately create a favorable macro environment for Bitcoin.