Crypto Market Falls As Trump Changes Fed Choice, AI Bubble Threat Rises

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The crypto market soared, with $527M in liquidity in 24 hours, indicating growing caution among traders.

Tight liquidity and rising AI debt risks will prompt traders to exit riskier assets, contributing to a market correction.

The cryptocurrency market saw a correction on Monday, with Bitcoin (BTC) retesting the $85,000 level and Ether (ETH) dropping to $2,900. Traders became more bearish after a survey showed a worsening economic situation in the US and changes in investor expectations regarding the options for the next US Federal Reserve chairman.

After hitting a low of 98.64 on Wednesday, resistance for the US 5-year Treasury strongly suggests that traders are looking to hedge against inflation, especially as the Fed cuts interest rates. The “One Big Beautiful Bill Act” extended tax credits and raised the U.S. debt ceiling by $5 trillion, a situation made more challenging by the Fed's recent decision to expand its balance sheet by $40 billion a month.

The consumer sector remains a concern, with a CNBC survey showing that 41% of Americans plan to spend less this year during the holidays, up from 35% in 2024. In addition, 61% of respondents cite affordability problems due to wage cuts amid inflation. US October retail sales data will be released on Tuesday, along with November's non-farm payrolls figures.

Overleveraging in the cryptocurrency market continues to be a major issue, with futures open interest standing at $135 billion. More than $527 million worth of leveraged positions have been liquidated in the past 24 hours, leaving traders worried about further declines. Weakness in the artificial intelligence sector has led traders to increase cash positions, exiting riskier asset classes such as cryptocurrencies.

Hedge fund giant Bridgewater Associates has reported that technology companies' reliance on debt markets to finance AI investments has reached a dangerous level, according to Reuters. “Going forward, there is a reasonable chance that we will soon find ourselves in a bubble,” Bridgewater Chief Investment Officer Greg Jensen wrote in a note.

Interest in using short (sellers) positions has increased on Bybit, with annual funding below zero. This unusual situation, where long (buyers) are paid to keep positions open, will not last long until arbitrage opportunities arise. However, since the Oct. 10 crash, liquidity has become so tight that some market makers may face significant losses.

Monday's decline in the U.S. stock market can be attributed in part to the diminishing prospect of Kevin Hassett replacing Jerome Powell as the next Fed chairman. President Donald Trump's inner circle has pushed for someone who is considered more independent, CNBC reports. Trump said on Friday that Kevin Warsh would also be “very good,” easing fears of a weaker U.S. dollar.

The US Dollar Index (DXY) found support at the 98 level after four straight weeks of decline. This stability reflects strong confidence in the US government's ability to avoid recession, which is somewhat supportive for the stock market but less so for cryptocurrencies.

Related: Bitcoin to $40K? Macro analyst Luke Gromen is bearish on Bitcoin.

Bitcoin and Ether are generally seen as part of an independent financial system, so the relative strength of the US dollar reduces the need for alternative hedges. Excessive leverage in the cryptocurrency market, coupled with broader macroeconomic uncertainty, may continue to weigh on prices.

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