Bitcoin’s ‘Trump trade’ is over — Traders shift hope to Fed rate cuts, expanding global liquidity

Financial markets are sending mixed signals as uncertainty reaches new highs. On Feb. 25, the US debt ceiling was raised from $36.1 trillion to $40.1 trillion, marking another massive expansion in government borrowing.

Following a historical pattern, the benchmark 10-year Treasury yield reacted to the news by dropping from 4.4% to 4.29%. While this may seem counterintuitive, markets tend to interpret debt ceiling resolutions as stabilizing events, reducing near-term uncertainty even if they imply higher borrowing down the line.

However, the stock and crypto markets, which usually benefit from lower bond yields as capital rotates into risk assets, have continued their fall that started last week. Since Feb. 21, the S&P 500 has lost 3%, the Nasdaq100 has dropped 5%, and Bitcoin has plunged 16%. The leading cryptocurrency is now trading 26% below its all-time high reached on President Donald Trump’s Inauguration Day, effectively erasing the Trump pump. 

A simultaneous decline in stocks and bond yields is not typical market behavior and suggests growing risk aversion and economic slowdown fears. 

Economic uncertainty looms over markets

Recent US economic data released on Feb. 21 has shown notable signs of weakness. The University of Michigan’s consumer sentiment index fell to 64.7 in February, down from 71.7 in January. This marks the lowest level since November 2023 and came in below the preliminary estimate of 67.8, which was also the consensus forecast among economists polled by Reuters. 

Existing home sales dropped 4.9%, and the S&P Global Purchasing Managers’ Index (PMI) fell from 52.7 in January to 50.4, the lowest since Sept. 2023. PMI tracks manufacturing and services activity, and a reading barely above the 50 threshold that separates expansion from contraction indicates stagnating growth in the private sector.

Trade tensions add to market uncertainty. On Feb. 24, Trump said that tariffs on Canada and Mexico “will go forward” after the deadline for the monthlong delay ends next week. Trump’s plan to impose 25% tariffs on the European Union, revealed on Feb. 26, and an additional 10% levy on Chinese goods added to the growing market anxiety 

In commentary to CNBC, Chris Rupkey, Chief Economist at FWDBonds, unapologetically said, 

“The economy is about to have the rug pulled out from under it as Washington policies are causing a rapid loss of confidence on the part of consumers.” 

Rupkey elaborated, “The economy is coming in for a crash landing this year. Bet on it. The bond market is.” 

In the crypto market, the Fear & Greed Index has plunged to 10, or Extreme Fear - a stark contrast to the Greed levels seen at the beginning of February.

A small crisis to justify quantitative easing?

In January, former BitMEX CEO Arthur Hayes speculated that a battle over the debt ceiling—combined with a reluctance to spend down the Treasury General Account—could push 10-year Treasury yields above 5%, triggering a stock market crash and forcing the the Federal Reserve to intervene. 

In his view, this could help President Trump to pressure the Fed into adopting a mode dovish stance. In other words, a small crisis to justify the QE and stimulate the economy. 

For Hayes, this mini-crisis must occur early in Trump’s presidency, during  Q1 or Q2, so he could blame it on the leverage built up during the Biden administration. 

“A mini financial crisis in the US would provide the monetary mana crypto craves. It would also be politically expedient for Trump. I think we pull back to the previous all-time high and give back all of the Trump bump.”

Ironically, even though the debt ceiling was raised with minimal drama, and 10-year Treasury yields have actually fallen, the stock market still dropped. The most pressing question now is whether this will lead to interest rate cuts.

The Fed remains neutral, with recent economic data providing little reason for an imminent policy shift. The latest CPI report on Feb. 11 showed inflation accelerating to 0.5% month-over-month, pushing the annual rate to 3%, both exceeding expectations. Fed Chair Jerome Powell has emphasized that the central bank won’t rush to cut rates further. Despite this position, a combination of weakening economic indicators and liquidity expansion may eventually force the Fed’s hand later this year.

Related: Short-term crypto traders sent record 79.3K Bitcoin to exchanges as BTC crashed to $86K

Bitcoin price and M2 changes have different paces

Despite the current market downturn, not all hope is lost, as a massive wave of liquidity expansion could be on the horizon. The expanding M2 global liquidity supply could breathe fresh air into the risk-on markets, especially Bitcoin. However, this might take some time.

The M2 Global Liquidity Index 3-Month Offset provides a useful framework for forecasting liquidity-driven market movements. This indicator shifts M2 money supply data forward by three months to analyze its relationship with risk assets.

Crypto analyst Crypto Rover highlighted this on X, stating:

“Global liquidity strengthening significantly. Bitcoin will follow soon.”

The historical performance shows that BTC usually lags approximately 60 days behind major global liquidity movements. The current drop inscribes perfectly into this picture, which also promises a strong rebound by June if liquidity trends hold.

Jeff Park, head of Alpha Strategies at Bitwise, echoed the sentiment: 

“Bitcoin can certainly go lower in the short term as it thrives on trend and volatility, both recently absent. But astute institutional investors don’t need to catch every wave; they just can’t miss the biggest one. And the biggest wave of global liquidity is coming this year.”

Jamie Coutts, a crypto analyst from Realvision, also shared his views on how liquidity expansion impacts Bitcoin price. 

“2 of 3 core liquidity measures in my framework [global money supply and central bank balance sheets] have turned bullish this month as markets dive. Historically, this has been very favorable for Bitcoin. Dollar is the next domino. Confluence is king.”

This article does not contain investment advice or recommendations. Every investment and trading move involves risk, and readers should conduct their own research when making a decision.