Crypto: A completely different asset – Can Wall Street control it?

Capital from financial institutions is flowing into the crypto market at a record pace. However, cracks are also starting to appear.

Experts warn that the traditional financial system may struggle to keep up with the continuous 24/7 volatility of the crypto space. This could lead to a liquidity crisis if the market turns down.

At the same time, expectations for the Fed to soon lower interest rates are supporting the upward momentum. However, when discussions on social media reach extreme levels, some reports view this as a warning signal of a local peak.

The liquidity risk is increasing

In this cycle, investment organizations play a leading role. However, their traditional risk management models are not suitable for the constantly changing volatility of the crypto market.

CEO of Custodia Bank, Caitlin Long, noted that in traditional finance, institutions always have protective measures such as the ( discount window ) or a tolerance mechanism for errors. However, in crypto, these mechanisms do not exist at all.

On Friday, Long spoke with CNBC at the Wyoming Blockchain Symposium:

"In the old financial system, delays were accepted because technology did not process in real time. But with crypto, everything happens instantly – that is a completely 'different point'."

The crypto market is characterized by: instant transactions, continuous volatility, and no room for error. Long warns that the next bear market could expose a "mismatch," making highly leveraged borrowing institutions struggle to adapt.

If this scenario occurs, the ripple effect could spread to the entire traditional financial market.

Does the rumor of the Fed cutting interest rates harm cryptocurrencies?

In addition to the risks from the investment organization, macro factors are also raising concerns.

The expectation that the Fed may cut interest rates in September has triggered a new growth wave in the crypto market, especially after the "dovish" remarks by Chairman Jerome Powell at Jackson Hole.

However, data from Santiment shows that the number of discussions about the keywords "interest rate cuts" or "Powell" on social media has surged to the highest level in nearly a year – often a sign that the bullish sentiment has become too hot, which may lead to the formation of a short-term peak.

Source: SantimentTypically, when an optimistic narrative prevails, the market often peaks shortly thereafter.

Although many traders believe that loose monetary policy will "fuel" crypto, excessive enthusiasm can sometimes be the catalyst for a correction.

Lowering interest rates does not mean that crypto will immediately explode

Not all experts believe that the Fed lowering interest rates will immediately help the crypto market explode.

Markus Thielen, Head of Research at 10x Research, believes that expectations for a rapid growth phase are premature. Although he still sees long-term potential with Bitcoin (BTC), concerns about recession risks may hinder prices in the short term.

Meanwhile, network economist Timothy Peterson emphasizes that if the Fed delays cutting interest rates this year, the negative impact on crypto will be even greater.

Currently, the probability of the Fed cutting interest rates is estimated by CME Group at 75%.

Source: CME GroupHowever, investors are advised not to have overly high expectations. Even if the Fed cuts interest rates, the positive impact on the crypto market may take additional time to truly manifest.

Vincent