Bitcoin and Ethereum's Rebound Amid Fed Policy Shifts and Liquidity Inflows

The cryptocurrency markets have entered a pivotal phase in late 2025, driven by a confluence of Federal Reserve policy adjustments and surging institutional adoption. Bitcoin (BTC) and Ethereum (ETH) are poised for a near-term rebound as liquidity injections from the Fed's shifting monetary policy align with a structural shift in institutional investment strategies. This analysis explores the interplay between these catalysts and their implications for the crypto asset class.

Fed Policy Shifts: A Tailwind for Liquidity and Risk Appetite

The Federal Reserve's October 2025 decision to cut the federal funds rate by 25 basis points, bringing the target range to 3.75%-4.00%, marked a critical pivot toward easing monetary policy. This move, coupled with the cessation of its balance sheet runoff program on December 1, 2025, signals a deliberate effort to stabilize financial conditions amid a slowing labor market and persistent inflation. By halting the reduction of its $6.57 trillion balance sheet, the Fed is projected to inject up to $95 billion in liquidity monthly-a reversal of quantitative tightening (QT) that historically correlates with crypto market rallies.

Historical parallels to 2019, when the Fed paused QT and crypto prices surged, suggest that the current liquidity shift could catalyze a similar surge in Bitcoin and Ethereum. Furthermore, cooling inflation, as indicated by Truflation's 2.45% year-over-year reading, has bolstered expectations for further rate cuts in 2026, reinforcing bullish sentiment for risk assets. Fed Chair Jerome Powell's cautious stance on additional December 2025 cuts underscores the central bank's data-dependent approach but does not negate the broader trend toward accommodative policy.

Institutional Momentum: ETFs, Custody, and Strategic Allocation

Institutional adoption of Bitcoin and Ethereum has accelerated in Q4 2025, driven by regulatory clarity and evolving investment frameworks. The approval of spot Bitcoin and Ethereum ETFs in the U.S., alongside the EU's MiCA implementation, has normalized crypto as a legitimate asset class. As of November 2025, 68% of institutional investors are either invested in or planning to allocate to Bitcoin exchange-traded products (ETPs), with 94% recognizing blockchain technology's long-term value.

Key developments include U.S. Bank's expansion of cryptocurrency custody services to support Bitcoin ETFs, addressing institutional concerns over security and compliance. Additionally, 80% of institutional investors express interest in crypto ETFs beyond Bitcoin and Ethereum, while 70% would increase allocations if staking capabilities are enabled-highlighting growing demand for Ethereum and altcoins like Solana. This shift reflects a transition from speculative trading to strategic diversification, with crypto now comprising 65% of the global crypto asset market capitalization at $1.65 trillion.

Synergy Between Policy and Institutional Flows

The interplay between Fed-driven liquidity and institutional inflows creates a self-reinforcing cycle for Bitcoin and Ethereum. Easing monetary policy reduces opportunity costs for holding non-yielding assets like Bitcoin, while institutional demand drives liquidity and price discovery. The end of QT, combined with the Fed's pivot toward rate cuts, is likely to amplify risk-on sentiment, further attracting capital to crypto markets.

Moreover, the Fed's balance sheet adjustments indirectly benefit Ethereum's staking ecosystem by increasing the appeal of yield-generating assets.

. As institutional investors seek alternatives to low-yielding traditional assets, Ethereum's proof-of-stake model and Bitcoin's halving event (scheduled for 2026) could amplify their attractiveness.

Conclusion: A Confluence of Catalysts

Bitcoin and Ethereum's near-term rebound is underpinned by two structural forces: the Fed's liquidity injections and institutional adoption. While macroeconomic uncertainties persist, the alignment of accommodative monetary policy with regulatory progress and institutional demand positions crypto as a key beneficiary of 2026's investment landscape. Investors should closely monitor the Fed's December 2025 meeting and institutional flow dynamics to capitalize on this momentum.