When the Fed Shifts Gears: What Q1 2026 Holds for Bitcoin and Ethereum

The Liquidity Game Matters More Than Rate Cuts

The U.S. Federal Reserve’s three rate cuts in 2025 told an interesting story—one that the crypto market didn’t seem to buy. While traditional wisdom suggests that easier monetary policy should boost risk assets, Bitcoin, Ethereum, and other major cryptocurrencies instead witnessed a significant pullback. From its October peak, the total crypto market cap contracted by more than $1.45 trillion, defying the dovish narrative.

Why? Because markets aren’t just reacting to interest rate decisions in a vacuum. Fed officials, including New York Federal Reserve President John Williams, made it clear there’s no urgency for additional easing. The central bank’s messaging focused on data dependence and inflation vigilance rather than a commitment to continued cuts. This uncertainty dampened the expected rally, suggesting that how the Fed manages liquidity—not just rate adjustments—will drive crypto market direction heading into the first quarter of 2026.

Two Diverging Paths: The Rate-Cut Pause Scenario

If the Federal Reserve maintains rates steady throughout early 2026, expect downward pressure on digital assets. According to Jeff Mei, COO of crypto exchange BTSE, a prolonged pause could trigger significant selloffs: Bitcoin could test $70,000 levels, while Ethereum might retreat toward $2,400.

The inflation data provides a mixed picture. November’s core CPI came in at 2.63%, which ordinarily would support rate-cut expectations. However, the U.S. government shutdown disrupted the Bureau of Labor Statistics’ normal data collection process, raising questions about whether those inflation readings accurately reflect true economic conditions. This ambiguity—combined with Fed officials’ cautious rhetoric—creates an environment where the absence of further easing could weigh heavily on speculative assets.

Currently, with BTC trading near $90.57K (up 0.11% in 24 hours) and ETH at $3.10K (down 0.98%), the market remains at a critical inflection point. A Fed pause would likely amplify downside risks.

The “Hidden Stimulus” Opportunity: RMPs and Market Support

Here’s where the narrative could shift. On December 1st, the Federal Reserve formally concluded its quantitative tightening phase and transitioned to a full rollover strategy for maturing Treasury and mortgage-backed securities. More significantly, it introduced Reserve Management Purchases (RMPs)—a roughly $40 billion monthly program of short-term Treasury bill acquisitions designed to stabilize banking sector reserves and ease money market pressures.

While RMPs operate at a fraction of the scale from the 2020-2021 quantitative easing era (when the Fed’s balance sheet expanded by approximately $800 billion monthly and crypto market cap surged over $2.90 trillion), they still represent a meaningful liquidity injection. Some market participants describe this as “stealth QE”—a less aggressive but still supportive monetary environment.

If these purchases continue throughout Q1 2026 at current levels, they could quietly sustain market liquidity and risk appetite without requiring dramatic rate cuts. This scenario paints a more optimistic picture: Mei suggests Bitcoin could appreciate toward $92,000-$98,000, driven by sustained institutional inflows through spot ETFs (projected to exceed $50 billion) and ongoing corporate accumulation strategies.

The Critical Variable: Fed Balance Sheet Direction

The distinction between what the Fed says about rates and what it does with its balance sheet has become the overlooked narrative in crypto market analysis. Rate cuts grab headlines, but liquidity conditions—shaped by RMPs and balance sheet management—often prove more consequential for asset price trajectories.

Q1 2026 will test this thesis. Either the Fed maintains a supportive liquidity framework through continued RMPs, supporting prices, or it signals a more restrictive stance by winding down these purchases, which could accelerate the downside scenarios outlined above. The market is effectively pricing in both possibilities, which explains why Bitcoin and Ethereum remain range-bound despite significant Fed policy evolution.

The coming quarter will clarify which direction prevails—and with it, whether digital assets rally on structural Fed support or face pressure from policy uncertainty.