2025 has come to an end, and the financial markets this year could be described as a mix of joy and disappointment for different players.

Thanks to Federal Reserve rate cuts and a significant surge in AI investment enthusiasm, global stock markets achieved nearly the largest annual gain in six years, while gold, silver, and platinum hit new all-time highs, delivering an impressive performance for traditional assets.

However, the crypto market became the biggest loser in this feast. Bitcoin's closing price in 2025 was lower than its starting price, marking the first time in history that Bitcoin recorded an annual decline one year after the halving. Once regarded as "digital gold," Bitcoin fell behind during this round of broad asset class rally.

The market's divergence regarding the long-term cycle structure of Bitcoin continues to expand. Some say the halving narrative has failed, and the four-year cycle has been broken; others believe this is just a temporary adjustment, and the real bull market is still ahead.

As 2026 begins, while wishing everyone a Happy New Year, I want to discuss several important monetary policy and political events in 2026 and see how they will impact the crypto industry.

The market bets that the Federal Reserve will cut rates 3 times.

After the Federal Reserve finishes its last meeting of the year, the rate forecast it releases is quite conservative, predicting that there may only be one rate cut in 2026, which would be a reduction of 25 basis points.

However, most institutions and economists do not see it as so pessimistic. Due to the political pressure of the midterm elections and changes in the Federal Reserve's personnel structure, they believe that the Federal Reserve's rate cuts in 2026 may exceed market expectations, with 2 to 3 rate cuts being appropriate.

Major institutions such as Goldman Sachs, Morgan Stanley, and Bank of America are basically betting on 2 rate cuts, expecting rates to drop from the current 3.50%-3.75% to around 3%-3.25%. Citigroup and China Galaxy Securities are a bit bolder, believing there will be 3 cuts, totaling 75 basis points.

Figure 1 Currently, the highest probability for the number of interest rate cuts predicted for 2026 on Polymarket is 2 times.

There are also many analyses regarding the specific months for interest rate cuts.

For those in power, low interest rates help stimulate the economy, thus enhancing electoral prospects. Therefore, in order to show the effectiveness of policies before the midterm elections on November 26, 2026, the Trump administration needs the Federal Reserve to make significant interest rate cuts beforehand. Considering the lag in the transmission of monetary policy to the real economy, rate cuts need to be completed before October 28, 2026; therefore, the December meeting is too late for the elections.

Therefore, major institutions predict that the interest rate cuts in 2026 will primarily occur in the first half.

For example, Nomura Securities predicts the specific months will be June and September; Goldman Sachs believes it will be March and June; Citigroup and Nederlandse Bank predict the timing will be January, March, and September.

Currently, a consensus is forming around a rate cut in June, as the new Federal Reserve Chair will preside over the FOMC meeting for the first time on June 17-18, 2026. Institutions are betting that this meeting will announce the likelihood of a rate cut.

The Federal Reserve restarts 'buying, buying, buying'

After discussing interest rate cuts, we need to talk about another important thing the Federal Reserve did at its last meeting in 2025: through a 'Reserve Management Purchase' (RMP) mechanism, it resumed buying government bonds.

Starting from December 12, 2025, the New York Fed will be purchasing about $40 billion in short-term Treasury bills each month. Officially, this is termed as a 'technical operation' and does not count as monetary policy; it is merely to ensure that the banking system has 'sufficient reserves' while also preparing for the tax season in April next year, as money will flow from banks to the Treasury at that time.

The Federal Reserve's balance sheet is currently about $6.54 trillion, and if it buys $40 billion per month through April next year, it will roughly add $160 billion in assets.

Besides the Federal Reserve buying government bonds, there is another data point worth noting: the Treasury General Account (TGA), which can be understood as the government's checking account at the Federal Reserve.

The last time the U.S. government shut down, the TGA balance reached a peak of $959 billion, with a large amount of cash accumulated in the Treasury account.

Figure 2 Changes in TGA Balance

It has been a month and a half since the U.S. government opened, and the balance of the TGA is about $850 billion. This means that $100 billion of spending has already been released, providing considerable liquidity to the market.

For the cryptocurrency market, what matters is whether total liquidity is increasing or decreasing.

So optimistically speaking, RMP purchases + significant decreases in TGA + the issuance of some form of tariff benefits at the end of 2026 could combine to give a significant boost to global liquidity, thereby assisting in the rise of the crypto market.

Why does Japan have to raise interest rates?

After talking about the Federal Reserve, let's shift our focus to Japan across the Pacific.

The minutes from the Bank of Japan's December meeting show that policymakers are discussing the necessity of continuing interest rate hikes, with some members calling for 'timely' actions to control inflation. A Bloomberg survey indicates that economists believe the Bank of Japan will likely raise interest rates again in about six months, with most expecting this round of increases to ultimately stop at 1.25%. Former Bank of Japan executive Hideo Hayakawa even stated that rates could rise to 1.50% by early 2027.

While the global market is cutting rates, why does Japan have to raise rates?

This issue must start from Japan's predicament. For decades, Japan has been battling deflation, with interest rates long near zero or even negative. But now the situation has changed; inflation has risen, wages have started to increase, and the Bank of Japan finally has the opportunity to 'normalize' its monetary policy.

The problem is that Japan is burdened with a massive debt, with government debt accounting for about 200% of GDP, and Japanese government bond yields have now fallen to levels not seen since before 2008. With such a high level of debt, if interest rates rise too quickly, the government's interest payments could explode, and the bond market might not be able to withstand it.

What is even more troubling is the yen. Before the meeting, the yen had already fallen to its weakest level in 10 months, approaching the point of 1 dollar to 160 yen, where the Japanese government had directly intervened in the foreign exchange market last time it reached this level. Logically, raising interest rates should lead to currency appreciation, but the yen has actually depreciated.

The core contradiction lies here: the Japanese economy is in a dilemma: either save the bond market or save the yen, both cannot be saved simultaneously. The Bank of Japan says it wants to raise interest rates to control inflation, yet it must also buy a large amount of Japanese government bonds to stabilize the bond market. Raising interest rates makes the yen more expensive, but at the same time, aggressively buying bonds injects liquidity, which is a bit like hitting your left hand with your right.

Now, the yield on Japanese government bonds has fallen to levels not seen since 2008, but the yen against the dollar is almost at a 35-year low. Therefore, it can be said that the Bank of Japan is actually 'sacrificing the yen to save the bond market.'

The impact of Japan's interest rate hike on the crypto market is directly visible; in the past few instances of Japan raising interest rates, the crypto market has experienced significant drops. The reason is simple: Wall Street and global speculators borrowed yen at nearly 0% cost, exchanged it for dollars, and invested in high-yield assets like Bitcoin and U.S. stocks. It's like someone is lending you money for free to speculate on cryptocurrencies, no interest loan, how happy are you? In this way, several trillion dollars have been borrowed out.

When Japan suddenly raises interest rates, the cost of borrowing yen increases, forcing these institutions to close their positions, thus selling off their risk assets, including Bitcoin, to repay yen loans.

So will Japan's interest rate hikes in the new year repeat the previous pattern of decline? Not necessarily. There are several reasons:

First, the market has already anticipated Japan's interest rate hike; in the new year, the interest rate increase will not be as sudden, and the market has begun to pay attention to this influencing factor, having discussed and adjusted positions several months in advance, unlike last year when they were caught off guard.

Secondly, as previously mentioned, the Federal Reserve is cutting rates on the other side. If the Federal Reserve does indeed cut rates 2-3 times in 2026, the interest rate differential between Japan and the U.S. will narrow, and the attractiveness of carry trades will naturally decline; a 0.25% increase in Japan may not have a significant impact.

Thirdly, the overall direction of liquidity is more important. With the Federal Reserve's personnel changes, RMP buying government bonds, the TGA account may continue to release liquidity, and there are even tariff benefits as part of this combined strategy. After all, no one wants to see better economic data before the midterm elections more than Trump. If the faucet in the U.S. is opened wide enough, the tightening effect in Japan may be largely offset.

Of course, short-term fluctuations are inevitable. If the Bank of Japan suddenly accelerates the pace of interest rate hikes, or if the Federal Reserve does not cut rates as aggressively as expected, the market could still experience short-term panic. However, from a medium to long-term perspective, the overall direction of global liquidity is the core variable determining the crypto market.

What if the Democratic Party wins the midterm elections?

After discussing so much about monetary policy, there is actually another factor that will directly impact the crypto industry in 2026, which is the U.S. midterm elections in November.

Trump and his Treasury Secretary Mnuchin are well aware that in order to retain the Republican Party's seats in Congress in the midterm elections, they must ensure that American citizens feel tangible economic benefits before voting. This is also why they are so eager to push for interest rate cuts and tariff benefits; all these policies aim to stimulate the economy before the midterm elections.

After all, the Democratic Party still seems to hold a comparative advantage. The local elections in the past month or two have given the Democratic Party a shot in the arm. They have won critical elections such as the Mayor of New York City, Governor of New Jersey, and Governor of Virginia, even making breakthroughs in traditionally red states.

For instance, a conservative district in Georgia has unexpectedly turned blue; remember that last year's presidential election saw Trump winning there by a margin of 12 percentage points. Also, in the Miami mayoral election, the Democratic Party won for the first time in 30 years. Even in Tennessee, a deep red state, the Republican Party only won by 8%, whereas previously not winning by over 20% would have been embarrassing. The victories in local elections are not coincidental; they indicate that voters are dissatisfied with the current economic situation. If this trend continues into next year, the Republican Party could indeed lose control of Congress.

Former House Speaker Pelosi recently expressed confidence in an interview, predicting that the Democratic Party will regain control of the House of Representatives in the 2026 midterm elections. There is a wave of optimism within the Democratic Party.

On the Republican side, there are many challenges:

Even if the Trump administration now starts adjusting tariff policies and pushing for interest rate cuts, it will be difficult to see results in the short term. The midterm elections are set for November, and considering the policy transmission time, the window for Trump is already quite tight.

Recently, Trump has been incessantly calling for Senate Republicans to abolish the 'filibuster' system, where senators can delay or prevent a bill from being voted on by continuously speaking. Trump wants to use this method to quickly advance his policies while also preventing the Democrats from obstructing and causing another 'shutdown' on January 30. However, there is considerable opposition within the party, with many Republican senators worried that setting this precedent could lead to future Democratic majority actions mirroring Trump's behavior.

As 2026 begins, it is still too early to judge the midterm election results; there are too many variables. However, a few points can be confirmed: to retain congressional seats, Trump will use all means available—rate cuts, fiscal stimulus, tariff benefits, anything that can be done will be done, and in the short term, this is beneficial for risk assets, including cryptocurrencies.

So from an investment perspective, the first half of 2026 may still have many opportunities and time windows for operation. However, in the second half of the year, with the midterm elections approaching, uncertainty will rise sharply. If polls show the Democratic Party leading, the market may price in this expectation in advance, and the crypto industry may face adjustment pressure.