At the beginning of 2026, many investors were confident that the Fed’s next major move would be to cut rates. This was the basis for much of the bullish scenario for bitcoin and the entire crypto market.
Now the situation looks different. The latest Fed minutes showed that the US regulator is no longer discussing policy easing as the base case. On the contrary, there is growing readiness within the Federal Reserve to tighten conditions again if inflation continues to rise.
The Market Has Completely Reassessed Rate Expectations
At the start of the year, the futures market was pricing in at least two rate cuts by the end of 2026. Rate hikes were hardly considered.
But by May 20, the situation had changed dramatically. According to CME FedWatch, the probability of a new rate hike by December rose above 54%, while chances of policy easing dropped to nearly zero.
This is a critically important reversal for the crypto market. The difference between a “delayed rate cut” and a full-fledged risk of new tightening is huge.
In the first case, the market simply waits longer for cheap money. In the second, investors start preparing for even tougher financial conditions.
Bitcoin Now Trades as a Macro Asset
Over the past two years, BTC has finally become an asset closely tied to global liquidity. As long as the Fed is cutting rates or at least preparing to do so, investors are more willing to take risks—from tech stocks to cryptocurrencies.
But when the market starts expecting rate hikes, things change in several ways. The dollar strengthens, bond yields rise, and liquidity becomes more expensive. That is exactly what is happening now.
The yield on 10-year US Treasuries has already risen to about 4.54%—the highest in about a year. For large funds, this is a serious problem for BTC. When government bonds offer nearly 5% annual returns with minimal risk, it becomes harder to justify holding volatile bitcoin from the perspective of classic capital allocation.
The Iran Conflict Has Increased Inflation Risks
One of the main factors behind the reversal in expectations was the situation in the Middle East. Rising oil prices after the escalation around Iran sharply increased inflationary pressure.
The April CPI in the US rose to about 3.8%, noticeably above the Fed’s 2% target. This forced some regulators to abandon even mild language about possible future rate cuts.
The market immediately took this as a signal: the Fed is starting to prepare for a tougher scenario. Additional pressure comes from the change in Fed leadership. The new head of the regulator, Kevin Warsh, is considered a much tougher inflation fighter than Jerome Powell.
ETFs Have Made Bitcoin Even More Sensitive to Rates
Spot bitcoin ETFs played a separate role. Before their appearance, the crypto market was relatively isolated from traditional finance.
Now BTC is traded within the same brokerage accounts as stocks and bonds. Institutional investors can quickly reduce positions in crypto just as they do in any other risky asset.
That is why macroeconomic deterioration now so quickly affects ETF flows. In the week after the Iran conflict escalated, spot bitcoin ETFs saw nearly $1 billion in net outflows, breaking a six-week streak of inflows. At the same time, oil rose above $110, and bond yields hit new local highs.
Regulatory Positives Are No Longer the Main Driver
Interestingly, from a fundamental perspective, 2026 still looks positive for the crypto industry. The market has received a friendlier SEC stance, progress on stablecoin laws, and improved institutional infrastructure. But now these factors have faded into the background.
The main theme is once again liquidity. And this is where the market faces a problem: regulatory improvements help the sector in the long term, but in the short term, crypto still depends on Fed policy and the cost of money.
Why the Market Fears a Repeat of 2022
Analysts are increasingly recalling the 2022 tightening cycle. Back then, the Fed raised rates from nearly zero to above 5%, and bitcoin crashed from about $69,000 to $15,500.
The situation is different now—the market has already partially priced in the risk of a new rate hike. So the mere fact of a possible hike will not be a shock.
What could be much more dangerous for crypto is a prolonged period of hawkish Fed rhetoric. Especially if the regulator starts signaling high rates all the way through 2027.
Bitcoin Is Caught Between Policy and Liquidity
Right now, BTC is effectively squeezed between two opposing forces. On one hand, the crypto industry is getting more and more support from major companies, ETFs, and US politicians.
On the other, the market is facing worsening global liquidity, a strong dollar, and rising bond yields.
Historically, liquidity has most often been the main factor for bitcoin’s price. And until the market sees a sustained slowdown in inflation or Fed policy easing, it will be difficult for crypto to return to a full-fledged bull cycle.
What Comes Next?
Now investors will be closely watching the next inflation data and the Fed’s June meeting. These will determine whether the current hawkish rhetoric is just a temporary reaction to oil and Iran, or the start of a new full-fledged tightening cycle.
For now, the market is increasingly coming to the conclusion that the main risk for bitcoin in 2026 is no longer regulation, but the cost of money in the global financial system.
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