Key Points:
The Federal Reserve has shifted from quantitative tightening and interest rate cuts to creating liquidity, which has reduced the attractiveness of fixed-income assets.
Tech credit risks have surged, exemplified by the high debt protection costs for Oracle, prompting investors to seek scarce assets like Bitcoin.
Bitcoin fell 4% on Friday, hitting a low of $88,140, with a decline of 19% since November. Meanwhile, the S&P 500 is less than 1% away from its all-time high. This severe divergence may soon converge through a strong upward movement in Bitcoin due to significant shifts in central bank policy and rising credit pressures.
This "perfect storm" is expected to push Bitcoin to the psychologically significant $100,000 mark before the end of the year.
The most critical factor is the Federal Reserve's shift from quantitative tightening. Quantitative tightening is the process of withdrawing liquidity from the financial system by allowing Treasury and mortgage-backed securities to mature without reinvesting the proceeds. The Federal Reserve officially ended this program on December 1.
Over the past six months, the Federal Reserve's balance sheet has shrunk by $136 billion, removing a significant amount of cash. The market is actively anticipating the next phase based on lower interest rates. According to the CME FedWatch Tool, bond futures assigned an 87% probability of a rate cut at Wednesday's Federal Reserve meeting, with three rate cuts fully priced in by September 2026.
Lower interest rates and increased systemic liquidity fundamentally weaken the demand for fixed-income assets. As the Federal Reserve cuts rates, the yields on new bond issuances also decline, reducing their attractiveness to institutional funds. According to Bloomberg, U.S. money market funds have now reached a historic high of $8 trillion.
Potential capital rotation is further incentivized by structural risks in the stock market, particularly in the tech sector. The cost of using credit default swaps to protect against Oracle (ORCL) debt defaults has surged to its highest level since 2009. As of the end of August, Oracle had $105 billion in debt, including leases.
According to Bloomberg, Oracle relies on hundreds of billions in revenue from OpenAI. The company is the largest debt issuer outside of the banking sector in the Bloomberg U.S. Corporate Bond Index. "Investors are increasingly concerned about how much supply there may be in the future," according to a credit strategy report from Citigroup.
Investors are worried about this high-risk push, which includes U.S. President Trump's Genesis Mission—a national plan aimed at doubling U.S. research productivity through AI and nuclear energy. The surge in demand for debt protection reflects extreme unease in the market about whether massive debt-driven spending can generate sufficient returns.
Bank of America strategist Michael Hartnett stated that if the Federal Reserve signals a commitment to maintaining stable interest rates, the probability of a broader economic slowdown will significantly increase. This uncertainty, combined with the demand for growth that relies less on stimulus, makes Bitcoin's scarcity more attractive as institutional capital seeks to reduce its traditional tech exposure risk.
The Federal Reserve's formal end to the "draining" liquidity withdrawal program, coupled with the market's aggressive pricing of rate cuts, provides a strong tailwind. As tech credit risks soar due to massive AI-related debt, capital is structurally prepared to shift towards scarce assets. This convergence paves a clear path for Bitcoin to break through the $100,000 milestone in the coming months.
Related: Bitcoin (BTC) wallet linked to Silk Road transfers $3 million to a new address
Original: “Bitcoin's End-of-Year Run to $100K Heavily Depends on Fed Pivot Outcomes”
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