At 3 a.m., staring at the latest Federal Reserve announcement, I laughed—$16 billion in liquidity injections, a scene that seems to replay every few years. As a market observer who has long studied liquidity indicators, I am increasingly convinced of one rule: changes in liquidity are like tides, cyclically driving the ups and downs of crypto assets, and the Federal Reserve is the switch operator.

**How Liquidity Dominates the Market**

On December 1st, the Federal Reserve officially ended its quantitative tightening plan. At the same time, they injected $13.5 billion into the overnight repurchase agreements of the U.S. banking system. How big is this number? It’s the second-largest single injection since the COVID-19 pandemic began, even more aggressive than the peaks during the internet bubble era.

Fundstrat analyst Tom Lee has an interesting point: in years when liquidity increases, risk-on assets always perform the strongest. This perfectly explains why Bitcoin and other cryptocurrencies are so sensitive to every move of the Federal Reserve—they are inherently risk assets, with an almost instinctive sense for liquidity.

Look at what happened at the end of November. The Fed signaled a rate cut, the market immediately responded, and cryptocurrencies collectively surged—Bitcoin’s single-day increase easily broke 4%. This is not a coincidence but proof of the increasingly close connection between traditional finance and crypto markets.

**How Money Flows into the Crypto Market**

The Federal Reserve turned on the faucet of liquidity, but how does this money ultimately flow into assets like Bitcoin and Ethereum? I’ve observed three main pathways at work.

First is the expansion of bank credit. After the Fed injected liquidity into the banking system, banks had more money to lend. When banks start lending actively, borrowing becomes easier, and this money eventually flows into venture capital, hedge funds, and retail investors. These funds flow into higher-risk asset classes—cryptocurrencies naturally become part of this.

Second is the asset price effect. When liquidity is abundant, valuations of various assets tend to rise. Investors seek higher-yield investments, and cryptocurrencies, with their high volatility and potential for high returns, become key targets.

The third transmission pathway is a shift in psychological expectations. The release of liquidity itself reinforces market optimism. When investors see the Fed releasing liquidity, they anticipate the economy will improve in the future, and risk assets will rise. This very expectation drives the crypto market higher.