The crossroads decision: From short-term stagflation concerns to a long-term liquidity bull market

Author: Proton Capital Research Team

We believe that the Federal Reserve has entered a new rate-cutting cycle, but in the short term, the market will still be affected by concerns about stagflation and policy uncertainty, and is expected to maintain a volatile pattern until the first quarter of 2026. In the medium to long term (starting from the second quarter of 2026), if political factors drive more aggressive easing policies, global liquidity is expected to expand again, and the market may restart a liquidity-driven upward cycle.

Regarding core assets:

• Bitcoin: In the short term, attention should be paid to the key support level of $105,000; if it falls below this level, it may trigger a new round of selling. However, in the medium to long term, in the context of increasing credit risk of the US dollar, it remains the preferred strategic allocation asset.

• Ethereum: The net inflow of ETF funds highlights its "utility-driven" value, and combined with the narratives of DeFi and RWA, it will further enhance its position in institutional allocations.

• BNB: The short-term price is expected to hover around $1,200. In the medium to long term, if on-chain trading volume and stablecoin supply remain strong, it is likely to break through $1,500, consolidating its leading position among high-frequency interaction public chains.

• Solana: The continuous enhancement of ecological innovation and capital activity is expected to continue receiving support from thematic ETFs and fund treasuries in the medium term. The short-term price range is expected to be around $250, while in the medium to long term, it may look towards $400.

September Market Review: Fed Rate Cuts Open a New Cycle

In September 2025, the global cryptocurrency market reached a critical turning point. After Bitcoin failed to break through $120,000, it retreated and tested the support at $108,000 again; mainstream assets such as Ethereum, BNB, and Solana also generally recorded double-digit declines, and the inflow momentum of funds from ETFs and listed company treasuries weakened. On September 17, the Federal Reserve announced a 25 basis point rate cut, lowering the target range for the federal funds rate to 4.00%-4.25%. This was the Fed's first rate cut in 2025 and a further easing measure after three rate cuts in 2024, marking the official entry of the global liquidity environment into a new adjustment cycle. This rate cut decision stemmed from a significant deterioration in US economic data, particularly the notable weakening of labor market indicators. The unemployment rate in the US rose to 4.3% in August, the highest level in four years, while non-farm payrolls only increased by 22,000, far below market expectations. More concerning is that the June employment data was revised down to a decrease of 13,000, marking the first negative growth since December 2020.

However, in stark contrast to the weak labor market, inflationary pressures have not completely eased. The inflation rate in August rose by 2.9% year-on-year, the highest level since January this year. Fed Chairman Powell emphasized in the post-meeting statement that "the US economy faces 'dual risks' of rising inflation and declining employment." This complex situation, characterized by emerging stagflation, poses a significant challenge to the Fed's policy choices—if rate cuts are "too aggressive," the 2% inflation target may not be achieved; if tightening policies are maintained for too long, it may lead to further weakness in the labor market.

The policy risk factors behind the rate cut decision are also worth noting. During this meeting, newly appointed Governor Milan independently advocated for a larger rate cut, which the market interpreted as an indirect reflection of the White House's influence on monetary policy. This situation has raised concerns that the Fed's independence may be challenged; if monetary policy is increasingly influenced by political cycles, it could undermine market confidence in dollar assets, although the final decision to cut rates by 25 basis points indicates that the Fed still maintains a degree of policy independence under political pressure.
Table 1: Performance of Major Assets After the Fed's Rate Cut in September

In September, the cryptocurrency market reacted relatively positively to the Fed's rate cut but showed restraint. This reaction pattern reflects market participants' cautiously optimistic attitude towards the Fed's rate-cutting path. Bitcoin briefly surged after the rate cut decision was announced but then retreated to consolidate, overall maintaining a relatively high level of volatility. Notably, the "zero-sum game" relationship between gold and Bitcoin continued to manifest in September. As the US dollar index fell to 96.22 (the lowest level since February 2022), dollar-denominated assets generally faced revaluation, but there was a clear rotation effect between traditional safe-haven assets (gold) and new digital value storage assets (Bitcoin).

Paradigm Shift Under Macroeconomic Changes: Policy, Deficits, and Institutional Capital's Migration to Crypto

The current cryptocurrency market is undergoing a profound structural transformation, driven not only by speculative enthusiasm within the market but also by deep changes in US macro policies, fiscal dilemmas, and financial regulations. The GENIUS Act, the "One Big Beautiful Bill Act," and the historic fiscal deficit in the US, along with the crisis of Fed independence, together create a complex picture that directly drives traditional institutional capital to reassess and enter the cryptocurrency space in large numbers.

• The "Double-Edged Sword" of Industrial Policy: The core of industrial policies like the "One Big Beautiful Bill Act" is to promote the return of strategic industries through massive fiscal spending. While this aims to enhance long-term competitiveness, it brings structural fiscal pressure in the short to medium term, expected to increase the federal deficit by about $3.3 trillion over the next decade. At the same time, supply chain restructuring and large-scale investments have also led to cost-push inflationary pressures.
• Crisis of Fed Independence: The aforementioned influences place the Fed in a dilemma. The government needs low interest rates to maintain the sustainability of massive debt, while inflationary pressures require monetary policy to remain tight. This fundamental conflict undermines market trust in the Fed's independence, eroding confidence in the global financial system based on dollar credit.
• Strategic Anxiety of Capital and Demand for "Hedging Against America": Against the backdrop of fiscal deficits and concerns about dollar credit, global capital is beginning to seek allocation options outside traditional dollar assets (such as US Treasuries), giving rise to the strategic demand for "hedging against America." Cryptocurrencies, with their decentralized, globally liquid, and scarce characteristics, are being reassessed as a strategic physical asset to hedge against sovereign credit risks.

Building Bridges for Compliance Entry

Macroeconomic anxiety is just the background; the large-scale entry of capital also requires compliant channels. This is precisely the key role played by the GENIUS Act.

The act establishes a federal regulatory framework for payment stablecoins, clearly defining them as payment instruments and requiring 1:1 high-quality reserve assets. This clear definition makes stablecoins a reliable, regulated bridge connecting traditional dollars and the crypto world. Traditional financial institutions can compliantly and efficiently allocate funds into the cryptocurrency market.

Figure 1. Growth of Stablecoin Market Capitalization (Source: CoinGecko)

Fundamental Shift in Market Structure

Under the combined effects of the aforementioned macro policies and regulatory frameworks, the funding structure and driving logic of the cryptocurrency market have undergone fundamental changes:

• From "Speculative Assets" to "Strategic Hedge Assets": Traditional capital's perception of cryptocurrencies has shifted. They are no longer seen merely as high-risk speculative tools but are viewed as a long-term allocation option to hedge against the credit risks of fiat currency systems amid macro uncertainty.
• Deep Changes Revealed by Stablecoins: The growth in the total supply of stablecoins (such as USDC) directly reveals the inflow of institutional-level dollar liquidity. It has become the compliant settlement network at the market's base, marking a core sign of the market structure shifting towards institutional-driven dynamics.
• De-Retailization and Deep Institutionalization: As traditional financial giants like BlackRock issue Bitcoin ETFs and banks begin to offer crypto custody services, the pricing power and dominant forces in the market naturally shift from retail investors to institutional investors with substantial capital, complex models, and strict compliance requirements. Consequently, market volatility, investment logic, and product forms are increasingly aligned with traditional finance.
• Relaxation of ETF Rules: On September 17-18, 2025, the SEC approved a general listing standard for commodity ETPs for three major exchanges (Nasdaq/Cboe/NYSE Arca), allowing qualified crypto asset ETFs to no longer go through individual 19b-4 case approvals, significantly shortening the listing cycle (about 75 days) and reducing costs, opening a "fast track" for multi-asset/single-chain thematic ETFs (such as SOL, XRP, etc.).

Scenario Analysis of Fed Policy Direction

Scenario 1: Fed Maintains Limited Independence, Deficit Problem Unresolved ------Crypto Market Steady but Under Pressure

The Fed will maintain a difficult balance between political pressure and economic fundamentals, with a relatively limited rate cut (expected cumulative rate cuts of 75-100 basis points in 2025). Despite ongoing pressure from the Trump administration, the Fed will continue to adhere to its "data-driven decision-making" model. However, the US fiscal deficit problem remains unresolved, with the budget deficit expected to remain around 6% of GDP. In this context, the stimulative effect of rate cuts on economic growth will be partially offset by the massive fiscal deficit, leading to upward pressure on long-term Treasury yields.

The impact on the cryptocurrency market will be significant and multi-layered. On one hand, the limited rate cut means that the liquidity environment will not be excessively loose, constraining the explosive growth potential of risk assets; on the other hand, the unresolved deficit issue will continue to erode dollar credit, accelerating the trend of de-dollarization. Although the US fiscal outlook has improved, the market has not "fully reflected" key developments in the US fiscal outlook, particularly the "debt trajectory improvement" driven by higher tariff revenues. In this environment, funds will seek safe-haven channels outside traditional dollar assets, with gold and cryptocurrencies becoming important beneficiaries.

In particular, changes in US pension policies will bring structural benefits to the cryptocurrency market. The US Department of Labor has officially revoked the restrictions on cryptocurrency investments in 401(k) retirement plans established in 2022. Currently, the total asset size of 401(k) plans is as high as $8.9 trillion. Assuming 1% flows into the cryptocurrency market, this represents a potential buying demand of nearly $8.9 billion, equivalent to 81,000 BTC. This entry of institutional-level funds will be a long-term strategic allocation, providing continuous capital inflow and support for the cryptocurrency market.

Scenario 2: Fed Loses Independence, Aggressive Rate Cuts Serve Political Purposes ------Crypto Market Welcomes Liquidity Boost

The market is concerned that the Fed's independence may face unprecedented challenges. If monetary policy is increasingly influenced by political cycles, a more aggressive easing path may emerge. The Trump administration could achieve direct intervention in monetary policy through personnel changes (such as dismissing current Governor Cook, who is cautious about rate cuts, and replacing the Fed chair after Powell's term ends in May 2026).

• Second Half of 2025: Pressure Accumulates, Rate Cut Magnitude Relatively Limited
  At this stage, despite significant political pressure (such as newly appointed Governor Milan calling for a 50 basis point rate cut), Powell can still maintain a degree of policy leadership. The Fed will continue to emphasize "data-driven decision-making." Therefore, the rate cut magnitude for the entire year of 2025 is more likely to approach the 75 basis points indicated by the median of the dot plot (i.e., three 25 basis point cuts). The main line of market trading will gradually shift from economic data to concerns about the erosion of the Fed's independence.

• 2026 and Beyond: Independence Significantly Weakened, Potential for Unexpected Rate Cuts
  If Trump successfully appoints a new chair inclined towards easing in 2026 and forms a majority advantage on the seven-member board, the Fed's policy balance will undergo a decisive shift. At that time, due to the needs of the political cycle (midterm elections), the pace of rate cuts may accelerate significantly. The market currently has relatively mild expectations for rate cuts in 2026 (the dot plot indicates only one additional cut), but in a politicized scenario, a total rate cut of 100-150 basis points for the year may become possible.

This policy path will trigger complex global chain reactions. If the Fed adopts significant rate cuts, it may release liquidity and support risk assets in the short term, but it could also trigger a rebound in inflation expectations, increasing long-term pressure on dollar credit. In this environment, global capital may partially shift towards anti-inflation and de-dollarization assets, including gold and certain cryptocurrencies.

When dollar assets are no longer the "only safe haven," gold and Bitcoin are becoming new landing spots for capital. Cryptocurrencies, especially Bitcoin, will no longer be merely investment options but strategic assets in the new global order.

From Bitcoin to Public Chains: Deepening Institutional Allocation

The path of institutional capital entry clearly shows a deepening process from allocating core assets to laying out ecological potential:

• Bitcoin: The "Ballast" for Macro Hedging. The allocation behavior of publicly listed companies is the most prominent. Publicly traded companies hold over 1 million BTC, indicating that Bitcoin's macro hedging attributes as "digital gold" have been highly recognized by some corporate treasuries. This behavior goes far beyond financial speculation and represents a long-term strategic allocation.

• Public Chain Tokens: From "Allocation Options" to "Special Strategies." A landmark change in 2025 is that institutions are beginning to establish dedicated treasuries for single public chains. Following Forward Industries' establishment of a treasury for Solana, AgriFORCE announced plans to raise $550 million to rebrand as AVAX One, focusing on the Avalanche ecosystem. This indicates that institutions are no longer satisfied with treating public chain tokens as part of an investment portfolio but are seeking to become important participants and beneficiaries in specific ecosystems through deep and focused layouts. Cases like Verb Technology reserving TON and SharpLink reserving ETH also confirm this trend. Furthermore, this trend is not only reflected in treasury reserves but is also beginning to extend to actual business implementations. For example, some fund managers have started to explore issuing fund share tokens on emerging public chains (such as Sei) to explore the on-chain path for RWA. Such initiatives indicate that the value of public chains is evolving from mere token investment to serving real finance and supporting the infrastructure for asset tokenization, providing traditional capital with clearer landing scenarios.

Figure 2. Market Capitalization of Tokenized Assets on Various Public Chains (Source: RWA.xyz)

Ethereum ETF: The Formal Entry Ticket for Traditional Finance

The approval and tremendous success of the Ethereum ETF in 2025 is a milestone event for the large-scale entry of traditional funds:

• Reversal of Fund Flows: Data shows that in the third quarter of 2025, the Ethereum ETF attracted new fund inflows, while the Bitcoin ETF saw fund outflows during the same period. This is not just a rotation of assets but signifies that Wall Street is recognizing Ethereum and its ecosystem (especially DeFi) as a potential future financial infrastructure.

• Utility-Driven Model: Unlike Bitcoin's primary narrative as a store of value, funds favoring Ethereum are more utility-driven. Its strong developer ecosystem, mature DeFi protocols, and the emerging narrative of tokenizing real-world assets (RWA) provide it with broader imaginative space.

Ecological Competition: A Contest of Activity and Liquidity

While institutions are laying out their strategies, the ecological activity of public chains themselves is the foundation for attracting funds:

• BNB Chain: With its deep user base and strong exchange ecosystem, it continues to lead in key metrics such as on-chain trading volume, active addresses, and stablecoin supply. Abundant liquidity makes it one of the preferred chains for DeFi activities and trading. In the short term (3-6 months): the price is expected to be around $1,200, mainly constrained by fluctuations in macro risk appetite. In the medium to long term (12-18 months): if its on-chain liquidity and DeFi activity remain strong, it is expected to reach $1,500, becoming a key allocation target for institutions in high-frequency interaction public chains.

Figure 3. Daily Trading Volume of BNB Chain (Source: BSCScan)

• Solana: It has performed outstandingly in the high-performance chain race, with a strong momentum of nearly $5 billion in hot capital growth in a single week. Its ecosystem maintains high activity and innovation in areas such as DeFi, NFTs, and AI-related tokens.

Overall, the funding landscape over the past year depicts a market characterized by deep institutionalization and layered logic:

1. Deepening Allocation Logic: Institutional behavior has evolved from purchasing Bitcoin as a macro hedge to allocating Ethereum as a utility asset through ETFs, and further to establishing dedicated treasuries for specific public chains (such as SOL, AVAX) for deep bets.

2. Restructuring of Market Structure: The proportion of traditional capital market tools (such as IPOs, convertible bonds) in Web3 financing has increased, with CeFi (centralized finance) financing dominating, indicating a deep integration of traditional finance and the crypto world.

3. Divergence of Main Chain Narratives: The market is no longer seeking a "universal" public chain but is layering based on demand: BNB Chain and Solana have become infrastructures for high-frequency, low-cost interactions; Ethereum has become a secure fortress for high-value asset settlement and DeFi; while chains like Avalanche are exploring new paths to attract long-term institutional capital through dedicated treasury models.

Stagflation Clouds: Transmission and Realization of Negative Factors

Tariffs, deficits, Fed independence, and inflation issues are forming a self-reinforcing cycle, with the transmission paths and impacts on the market shown in the table below:

Table 2: Macroeconomic Negative Factors

It is precisely the gradual realization of these negative factors after September that has led to the cryptocurrency market's lack of upward momentum. The market logic has shifted from "trading rate cuts" to "worries about stagflation." Investors realize that the Fed's rate cuts are not proactive adjustments of a strong economy but rather passive measures to respond to economic slowdown, potentially at the cost of price stability. The looseness in this context is far from the conditions required for a liquidity-driven bull market.

Summary of the "Soft Landing" Prospects for the US Economy

The narrative of a "soft landing" (i.e., inflation smoothly falling back to 2% without the economy falling into recession) is facing severe challenges. The current data and policy environment lean more towards a scenario of "no landing" or "stagflation."

• Increased Risk of "No Landing": The economy continues to grow, but inflation stubbornly hovers around 3%, which will force the Fed to maintain restrictive rates for a longer time, exerting continuous pressure on economic growth and risk assets.

• Narrowing Window for "Soft Landing": Under the triple pressure of high fiscal deficits, tariffs pushing up prices, and political interference in central bank decisions, the Fed faces immense difficulty in achieving a "soft landing" through precise monetary policy. Data shows that in August 2025, the year-on-year growth rate of the US core PCE price index remained around 3.0%, with month-on-month fluctuations still in the range of 0.2%-0.3%, both exceeding the Fed's long-term inflation target of 2%. This indicates that inflationary stickiness still exists; even as overall economic growth slows, the decline in price levels is limited. In other words, the pattern of "slowing growth + inflation not fully receding" further narrows the window for a "soft landing," compressing the Fed's policy space between rate cuts and inflation control.

Figure 4. US PCE Price Index (Source: Macromicro)

The conclusion is that the likelihood of a "soft landing" for the US economy is significantly decreasing, and the market needs to prepare for a more complex macro environment.

In addition to macro factors, several recent market hotspots have also intensified volatility:

1. Reversal of Fund Flows in Bitcoin ETFs: In September, the US Bitcoin spot ETF experienced several weeks of net outflows, contrasting sharply with the continuous net inflows seen in the first half of the year. This indicates a cautious shift in the short-term attitude of institutional funds, weakening a major buying support for Bitcoin.

2. Key Support Levels on the Technical Front Under Test: Bitcoin's price has tested the important psychological and technical support level of $105,000 multiple times. A significant drop below this level could trigger a new round of technical selling.

3. Escalation of Geopolitical Conflicts: The recent escalation of international geopolitical tensions traditionally drives funds into traditional safe-haven assets like the dollar, rather than Bitcoin. This partly explains why cryptocurrencies have failed to exhibit their "digital gold" safe-haven properties amid increasing uncertainty.

Turning Point for the Fed

The key time nodes and potential turning points for the Trump administration's influence on the Fed's independence through personnel appointments are aimed at creating a loose monetary environment for the midterm elections in November 2026 and alleviating the pressure of the US fiscal deficit (with the deficit rate expected to remain around 6% of GDP). The core logic is that Trump aims to reshape the Fed's decision-making body by installing doves, thereby pushing for more aggressive rate cuts, which could ultimately trigger a liquidity-driven bull market in cryptocurrencies.

Table 3: Key Personnel Events That Have Occurred and May Occur

The core political motivation behind these changes is to create a loose monetary environment for the midterm elections in November 2026 and alleviate fiscal deficit pressures under high interest rates. The potential impact paths on the market and cryptocurrencies are as follows:

• Short Term (Current to Early 2026): Uncertainty and Volatility Dominate
  Under the shadow of legal lawsuits and policy disagreements, the market will remain cautious. The cryptocurrency market is more likely to show volatility or pullbacks influenced by concerns about "stagflation" and high leverage liquidations. The Supreme Court ruling on the Cook case will be the first important indicator.

• Medium Term (After Q2 2026): Political Rate Cut Expectations and Liquidity Boost If Trump succeeds in his personnel arrangements, especially by appointing a dovish new chair, the market will begin to trade on expectations of "politicized rate cuts." The Fed may initiate rate cuts far exceeding current market predictions. This would lead to a weaker dollar and a flood of liquidity, benefiting cryptocurrencies like Bitcoin.

• Long-Term Impact: From "Risk Assets" to "Strategic Hedge Assets"
  The loss of the Fed's independence will profoundly shake the foundation of dollar credit. The narrative around cryptocurrencies will thus be strengthened, shifting from purely technological risk assets to strategic tools for hedging against dollar credit risks and global liquidity excess.

Conclusion

The Fed's rate-cutting cycle has begun, but the current market reflects more the dual pressures of economic slowdown and inflation stickiness rather than purely liquidity benefits. We believe that in the short term (until Q1 2026), the cryptocurrency market will be in a volatile pattern, constrained by concerns about stagflation, policy uncertainty, and weakening risk appetite. During this phase, a defensive approach should be taken, reducing leverage, maintaining position flexibility, and closely monitoring the price performance of Bitcoin and Ethereum in key ranges as a reference for market sentiment.

In the medium to long term (starting from Q2 2026), potential policy turning points lie in the evolution of the Fed's independence and the involvement of political factors. If more aggressive easing policies emerge, the market may re-enter a liquidity-driven upward cycle. At that time, Bitcoin, which is sensitive to macro conditions, as well as Ethereum and certain mainstream public chains (such as BNB and Solana) that have application and ecological support, are expected to become key beneficiary assets for institutional allocations.

Overall, our core judgment is: the short-term market needs to cope with macro uncertainty and volatility, but the long-term allocation logic remains unchanged. Cryptographic assets are gradually evolving from high-volatility speculative targets to strategic allocation categories that can be considered within the global asset allocation framework. Investors should gradually establish long-term positions that align with their risk preferences while controlling risks.