Interest Rate Expectation Turning Point

Recently, the CME "FedWatch" tool has once again become the main line of market trading regarding interest rate paths. Data shows that the probability of the Federal Reserve maintaining the current interest rate in January next year has risen from about 73% a week ago to 84.5%, with the latest update approaching 86.7%. The market's bets on "immediate rate cuts" have significantly receded. Correspondingly, the probability of a 25 basis point rate cut in January has fallen from around 26.6% to about 15.5%, with the latest reading dropping to 13.3%. By March next year, while the cumulative probability of a 25 basis point rate cut still fluctuates within the range of 40%-46%, it has contracted compared to before, and the probability of a cumulative 50 basis point cut is only about 6%, indicating that expectations for "aggressive easing" have basically been ruled out. During this process, interest rate expectations have quickly transmitted to cryptocurrencies like Bitcoin through the repricing of U.S. dollar liquidity and the risk-free yield curve: on one hand, it suppresses high-leverage long positions and risk appetite; on the other hand, it amplifies the rhythm of capital inflows and outflows within the existing price range, making the crypto market more sensitive to every slight adjustment in interest rate probabilities.

News and Expectations

From a timeline perspective, between December 18 and 25, the market's probability of maintaining interest rates in January next year steadily rose from about 73.4% to 86.7%, while the corresponding probability of a rate cut nearly halved from 26.6% to around 13%. This significant change in slope indicates that traders are systematically correcting their previous aggressive bets on "early and rapid rate cuts." By March next year, the cumulative probability of a 25 basis point rate cut given by CME FedWatch is between 40% and 46%, with the probability of maintaining rates unchanged at about 50%, and the probability of a cumulative 50 basis point cut only about 6%. This is a significant contraction compared to earlier scenarios where it was often bet that "easing would begin in the first half of the year." On a macro level, data from the U.S. Department of Labor shows that the hourly output of all non-farm workers grew by 3.3% year-on-year in the second quarter, a significant improvement from the previous quarter's year-on-year decline of 1.8%. Morgan Stanley has thus proposed the judgment of "no employment productivity boom"—with limited employment expansion, productivity improvements suppress inflation, leaving room for more rate cuts in the future, but not forcing the Fed to rush to change course in the short term. It is important to emphasize that all probabilities mentioned in this article come from publicly available CME FedWatch and some Polymarket data snapshots, and the points will fluctuate in real-time with new data and trading behavior. Market participants can only judge based on ranges and trends, and cannot treat any single point in time as "official forward guidance."

Data Source Discrepancies

Interest rate expectations are inherently filled with uncertainty, and more complex is the fact that different data sources provide inconsistent "market consensus." For example, for January next year, CME FedWatch currently shows the probability of maintaining interest rates unchanged at roughly 85%-87%, while the implied probability corresponding to the "no rate cut in January" contracts on some prediction market platforms like Polymarket is around 80%, indicating a gap of over 5 percentage points. Some KOLs point out that Polymarket, as a real-money betting event prediction market, has prices directly matched by "gamblers" spread across the globe, which may be closer to the true risk preferences of traders; others insist on using CME as the core reference, believing that pricing based on implied probabilities from interest rate futures better represents the views of professional institutions. In essence, the two types of data are based on completely different logics: FedWatch derives interest rate paths from the implied yields of derivatives markets such as Eurodollars and federal funds futures, with pricing entities primarily consisting of institutions and hedge funds; Polymarket, on the other hand, is a prediction market based on binary event contracts, with a participant structure closer to retail investors and crypto-native players. Neither is the "official guidance" of the Federal Reserve; they are merely different dimensions of market subjective pricing. Misreading any probability value as "the Fed has already decided to act this way" often incurs costs in trading.

Price and Liquidity

While macro expectations are cooling, the price range of Bitcoin itself also lacks sufficient historical support, further amplifying risks. Based on the past five years of CME Bitcoin futures and Glassnode's UTXO realized price distribution (URPD) data, BTC has only accumulated 28 trading days in the $70,000-$80,000 range, making it one of the areas with the thinnest chips in overall history; the $80,000-$90,000 range, while slightly better, has only 49 trading days. In contrast, the $30,000-$40,000 and $40,000-$50,000 ranges have accumulated nearly 200 trading days of transactions and positions, providing much more solid support. When rate cut expectations cool and global liquidity becomes marginally tighter, prices standing in such a "light chip range" make any concentrated buying or selling in either direction more likely to trigger violent fluctuations and rapid corrections. The 2025 derivatives annual report shows that the total contract trading volume reached a staggering $85.7 trillion for the year, averaging about $264.5 billion per day, with a single-day transaction peaking at $748 billion on October 10; global perpetual and futures positions climbed from a low of about $87 billion in the first quarter to a peak of $235.9 billion in October, before falling back to $145.1 billion by year-end. Meanwhile, the total annual clearing amount was about $150 billion, averaging $400-$500 million per day, with a spike to the range of $19-$40 billion on October 10-11, setting a new historical record. In such a microstructure, every slight adjustment of macro interest rate expectations towards "longer and higher" will be magnified through fragile support zones and high-leverage chains, resulting in significant price elasticity.

Institutions and Long/Short Positions

From the exchange landscape, the main long and short positions and hedging forces in crypto derivatives in 2025 are highly concentrated on a few leading platforms. For example, according to the statistics in the annual report, the top four in terms of derivatives trading volume and market share are Binance, OKX, Bybit, and Bitget, with leading platforms scoring significantly higher in futures, perpetuals, and options compared to long-tail exchanges, indicating that the vast majority of leveraged positions and hedging are piled up on the same order books. Compared to the previous year, on one hand, crypto-native platforms like Binance have surpassed CME in Bitcoin futures open interest, while on the other hand, internal statistics show that CME Bitcoin futures positions have dropped to their lowest level since February 2024, reflecting that traditional institutions are shrinking high-risk arbitrage and directional heavy positions in the current phase where the interest rate path is still unclear. Institutions are more likely to use BTC spot ETFs, options, and futures for light position allocations and volatility hedging, rather than betting on one-sided upward movements with high leverage as they did when rapid easing was expected. Looking back at October 2025, the daily clearing of derivatives surged to a historical peak of $19-$40 billion on October 10-11, wiping out a large number of high-leverage long positions in a short time, fully demonstrating the fragility when macro expectations reverse combined with high concentration leverage. The current shift in interest rate expectations from "rapid rate cuts" to "possibly longer and higher" is driving further deleveraging among such institutions and increasing the risk of price declines in a localized liquidity vacuum.

Sentiment and Game Theory

On the emotional level, the cooling of rate cut expectations brings about a subtle state of "short-term caution, long-term not collapsing." The community is generally aware that when the probability of maintaining interest rates unchanged in January rises to nearly 90%, and the rate cut in March is only significantly limited, the short-term liquidity environment is unlikely to show significant easing, thus leaning towards reducing leverage and compressing intraday fluctuations rather than increasing bets on price rises. On the other hand, whether it is the 3.3% productivity growth disclosed by the U.S. Department of Labor or Morgan Stanley's view that "no employment productivity boom" will open up space for more rate cuts in the future, both support a long-term bullish narrative that has not yet been disproven: technological advancements reduce inflationary pressures, ultimately leading to a decline in the interest rate center, thereby enhancing the valuation of risk assets. As one KOL stated, "The current market decline, low trading volume, and price downturn mainly reflect institutions and users' lack of optimism about the short-term market, rather than a loss of faith in the entire crypto asset class"; the current market lacks new stories like NFTs, inscriptions, and blockchain games that can quickly attract incremental retail investors, causing every negative disturbance in macro interest rate expectations to be amplified by sentiment. Bulls are betting on productivity improvements and subsequent easing leading to valuation repricing, while bears emphasize the short-term "longer and higher" rates and the downward elasticity brought by the weak support range of $70,000-$90,000. In this context, the short-term trading line is quietly shifting from "All in betting on rapid easing" to "structural timing and low-leverage defense," with more players choosing to hedge risks around key data and meeting windows rather than gambling on a single outcome.

Post-Market Scenario Simulation

In the baseline scenario, if the Federal Reserve maintains interest rates unchanged in January next year as indicated by the current probability of about 85%-87%, Bitcoin is likely to continue oscillating within the historically weak support range of $70,000-$90,000, gradually building a new chip distribution over time. URPD data shows that the historical stay time in this range is only about 70 trading days, and even if there are multiple downward retracements during the oscillation process, as long as deep support zones like $30,000-$50,000 are not systematically broken, the medium to long-term bullish structure can still be maintained. Once by March, the cumulative probability of a 25 basis point or even 50 basis point rate cut is raised again by the market, or inflation and growth data jointly support a faster easing path, institutions may reallocate through spot ETFs, options, and futures, combined with retail investors' emotional following of the "policy turning point," potentially reinforcing the medium to long-term bullish trend of BTC. Conversely, if subsequent economic data strengthens the "longer and higher" interest rate expectations, causing the implied probabilities of "no rate cuts for the year" contracts on CME and Polymarket to rise further, two transmission chains need to be monitored: first, traditional institutions may further reduce their allocation to risk assets in a high risk-free yield environment; second, the remaining high-leverage positions in crypto derivatives may be concentrated and liquidated during volatility, triggering a downward amplification effect similar to that in October. For traders, a more rational approach is to view the probabilities given by CME/Polymarket as a "thermometer" of market sentiment and expectations, rather than a definitive path: in trading decisions, it is crucial to track key macro data points such as inflation, employment, and productivity, as well as changes in funding conditions like ETF subscriptions, futures positions, and clearing volumes, avoiding concentrating bets on any single FOMC meeting or individual interest rate event, and using position management and leverage control to leave room for buffer against unpredictable path changes.

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