Fed chair shock and fresh AI-bubble talk send Bitcoin and altcoins into a fast unwind

Fast sell-off as policy shock met AI-bubble chatter

Markets woke to a sudden policy shock: a surprise switch at the top of US central banking that immediately raised doubts about the outlook for interest rates. Crypto traders reacted fast. Bitcoin (BTC) and Ethereum (ETH) led a broad sell-off, while many large-cap altcoins plunged more deeply. The initial move was violent enough that volumes spiked and liquidations accelerated across futures venues.

This was not a slow rethink. The combination of policy uncertainty and fresh talk that the recent AI-led rally had turned into a speculative bubble pushed risk appetite lower. Investors who had been leaning long — many using leverage — rushed to de-risk. In plain terms: people sold first and asked questions later, amplifying price falls in an already fragile market.

Price action and market internals: where the pain showed up

Bitcoin and Ethereum bore the brunt of the hit. BTC and ETH flashed big intraday drops and turnover surged, a classic sign that weaker hands and highly leveraged positions were getting flushed out. Many top-cap altcoins fell even harder in percentage terms, a pattern you see when traders pull capital out of the riskiest parts of the market.

Stablecoin flows tightened: large inflows into major USD-pegged coins suggested holders wanted to sit on the sidelines in a safe, liquid form rather than into fiat. On-chain liquidity metrics — like available coins on exchanges — showed a noticeable increase, meaning more supply was parked where it could be sold quickly.

Derivatives markets amplified the move. Futures funding rates flipped negative in several markets, indicating shorts were being paid and longs were getting squeezed. Open interest initially spiked as stop-loss cascades triggered fresh orders, then dropped as forced liquidations closed positions. That pattern — a rush of liquidations that briefly raises open interest before it collapses — often accelerates corrections and raises short-term volatility.

Why policy uncertainty and AI chatter forced the rush for the exits

The immediate trigger was political: the unexpected change in the Fed chair picture. When the person steering rate policy is unclear, uncertainty about when and how fast rates will move rises. For assets priced on future growth and liquidity, like crypto, that uncertainty raises the required risk premium. Investors demanded a bigger discount for holding volatile assets today.

At the same time, renewed commentary warning that the AI-led rally in tech looked like a bubble shifted a broader risk narrative. That story moved money out of ‘growth’ and ‘story’ trades — categories under which many crypto assets still sit. Put together, these two threads pushed both institutional and retail players toward safer holdings.

Macro strains in US data and weaker risk-on flows in equities made the move worse. Crypto is not an island: when stocks or tech names wobble, correlated selling in crypto can follow, especially when leverage is common and liquidity is shallow compared with big equity markets.

What traders should watch next: liquidity, leverage and correlation signals

In the near term, liquidity and leverage are the main dangers. Watch exchange reserves and where coins are concentrated; a continued rise in on-exchange balances makes another leg down more likely. Monitor futures funding rates and open interest. If funding stays sharply negative and open interest rebounds, that could signal another short squeeze or a deeper deleveraging phase.

Correlation with equities is another key gauge. If stocks stabilize while crypto remains weak, that points to crypto-specific clearing. If both move together, broader risk-off is the driver and crypto could face further pressure alongside equity markets.

Short-term watchlist: the signals that could flip sentiment

There are a few events and indicators that can reverse or deepen this sell-off. First, any clear messaging from the Fed on policy direction that reduces uncertainty would likely calm markets. Second, US macro prints that show inflation or jobs surprising to the upside or downside will move risk appetite fast. Third, large exchange liquidations or big off-chain moves into stablecoins are red flags for more pain.

On-chain, watch stablecoin mint/burn activity, exchange inflows, and whale transfers. For traders, a sensible cadence is daily checks on funding rates and exchange balances, with quicker alerts for large liquidation clusters or a sudden fall in on-exchange liquidity.

Bottom line: this sell-off was a near-term risk reset driven by policy uncertainty and a shift in narrative about AI and speculative excess. For now, traders should treat crypto as highly sensitive to macro headlines and manage for quick liquidity swings and leverage-induced volatility.

Sources

• cointelegraph.com