Original author | Arthur Hayes (Co-founder of BitMEX)
Compiled by Odaily Planet Daily (@OdailyChina)
Translator | Azuma (@azuma_eth)
Editor's Note: This article is a new piece published this morning by Arthur Hayes, co-founder of BitMEX (Sasa). In the article, Arthur analyzes potential actions that the Federal Reserve and the Treasury may take in the future, and what impact those actions may have on the overall liquidity of the dollar in the market. Arthur is generally optimistic about the first quarter's market, believing that the disappointment over the effects of the Trump team's policy shift can be overshadowed by a very positive dollar liquidity environment. However, Arthur also predicts that the market will peak by the end of the first quarter and won't improve until the second half of the year. Arthur also mentioned that his fund Maelstrom has purchased several DeSci concept coins such as BIO, VITA, ATH, GROW, PSY, CRYO, and NEURON, believing that the market will soon reprice DeSci.
The following is the original content from Arthur, translated by Odaily Planet Daily. Due to Arthur's writing style being too casual, there are significant portions of the text that are unrelated to the main content. To facilitate understanding for readers, Odaily has made some reductions in the compilation.
Near the ski resorts in Hokkaido, there grows a type of bamboo called 'Sasa,' whose stems are thin like reeds but have sharp green leaves that can easily cut the skin. Therefore, skiing can be very dangerous without sufficient snow covering the slopes.
This year, Hokkaido's snowfall has set a record for the past seventy years, so the ski resorts opened their doors at the end of December, rather than waiting until the first or second week of January as in previous years.
Odaily Note: These two paragraphs are not all nonsense; by the end, you will understand what Arthur wants to express.
In the previous article (Trump Truth), I predicted that the market's expectations for the policy shift after Trump's ascension were too high, leading to disappointment. I still believe this is a potential negative factor that may weigh on the market in the short term, but at the same time, I must balance the driving effect of dollar liquidity. Currently, Bitcoin fluctuates with the changes in dollar supply. The powers that be at the Fed and U.S. Treasury determine the amount of dollar supply in the global financial market.
Bitcoin bottomed in the third quarter of 2022, when the Fed's reverse repo mechanism (RRP) peaked. At the behest of U.S. Treasury Secretary 'Bad Girl' Yellen (the nickname Arthur gave Yellen), the Treasury issued fewer long-term interest-bearing bonds and more short-term zero-coupon notes, drawing over $2 trillion from RRP. This injected liquidity into global financial markets. Cryptocurrencies and stocks (especially large tech stocks listed in the U.S.) plummeted as a result. The above image shows the comparison between Bitcoin (left, yellow) and RRP (right, white, inverted) — it can be seen that as RRP declines, Bitcoin rises almost in sync.
The question I want to answer is whether, at least in the first quarter of 2025, the positive supply of dollar liquidity can offset the market's disappointment with the intensity of Trump's policy shift. If the answer is yes, then one can trade with confidence now, and Maelstrom should also amplify risks on paper.
I will first discuss the issues with the Federal Reserve, but this is only a secondary factor in my analysis. After that, I will discuss how the U.S. Treasury will respond to the debt ceiling issue. If politicians hesitate to raise the debt ceiling, the Treasury will exhaust its General Account (TGA) at the Fed, injecting liquidity into the system and creating positive momentum for cryptocurrencies.
For the sake of brevity, I won't explain why RRP and TGA's debits and credits have negative and positive impacts on dollar liquidity respectively. If you haven't read my previous article, please refer to (Teach Me Daddy) for a detailed mechanism.
Federal Reserve
The pace of the Federal Reserve's quantitative tightening (QT) policy remains at $60 billion per month, indicating a reduction in its balance sheet size. The Fed's forward guidance on the pace of quantitative tightening remains unchanged. I will explain the reasons for this later in the article, but my prediction is that the market will peak in mid to late March, leading to $180 billion of liquidity being removed from January to March.
RRP has fallen to nearly zero. To completely exhaust this mechanism, the Fed has belatedly changed the policy rate for reserve requirements. At the meeting on December 18, 2024, the Fed lowered the RRP rate by 0.3%, which is 0.05% more than the reduction in the policy rate. This is to tie the RRP rate to the lower bound of the federal funds rate (FFR).
If you're curious why the Fed waits until RRP is nearly exhausted to align interest rates with the lower bound of FFR and reduce the attractiveness of deposits in that mechanism, I highly recommend you read Zoltan Pozar's article (Cheating on Cinderella). The insight I gained from his article is that the Fed is exhausting all means to stimulate demand for U.S. Treasury issuance before it stops QE, re-issues leverage ratio exemptions to U.S. commercial bank branches, and possibly resumes quantitative easing (QE), aka the so-called 'money printing machine.'
Currently, there are two pools of funds that will help control bond yields. For the Federal Reserve, it cannot let the 10-year U.S. Treasury yield exceed 5%, as this is the level at which bond market volatility erupts (MOVE index). As long as there is liquidity in RRP and TGA, the Fed does not need to make significant changes to monetary policy and acknowledges that fiscal dominance is at play. Fiscal dominance effectively confirms Powell's subordinate position to Yellen and her successor Scott Bessent (Trump's nominee for Treasury Secretary). I will eventually give that kid Scott a nickname, but I haven't thought of a good one yet. If this affects his decision-making, making me look like a modern-day Scrooge McDuck (a classic animated character set as the richest duck in the world) by choosing to devalue the dollar (against gold), I will give him an even more flattering nickname.
Once TGA is depleted (positive dollar liquidity), and then replenished due to reaching and raising the debt ceiling (negative dollar liquidity), the Fed will have no options to prevent yields from rising inexorably since the decision to begin the easing cycle last September. However, this is not actually important for the dollar liquidity situation in the first quarter; it's just a side thought about how the Fed's policy may evolve later this year if yields continue to rise.
The comparison between the FFR upper limit (right, white, inverted) and the U.S. 10-year yield (left, yellow) clearly shows that as the Fed lowers interest rates when inflation is above its 2% target, bond yields have risen.
The real issue is the speed at which RRP declines from about $237 billion to zero. I expect that as money market funds (MMFs) maximize their yields by withdrawing funds and purchasing higher-yielding Treasury bills (T-bills), it will approach zero at some point in the first quarter. In other words, this means that there will be a $237 billion injection of dollar liquidity in the first quarter.
After the RRP rate adjustment on December 18, the yield on Treasury bills with maturities of less than twelve months exceeded 4.25% (white), which is the lower limit of the federal funds rate.
Due to quantitative easing, the Fed will remove $180 billion of liquidity, while the reduction in RRP balances due to its adjustment of the reward rate will encourage an additional injection of $237 billion of liquidity. A total net injection of $57 billion of liquidity.
U.S. Treasury
Yellen told the market that she expects the Treasury to take 'extraordinary measures' to fund the U.S. government between January 14 and 23. The Treasury has two options for paying government bills. They can either issue debt (negative dollar liquidity) or spend funds from the Fed's checking account (positive dollar liquidity). Since the total debt won't increase until Congress raises the debt ceiling, the Treasury can only spend from its checking account (TGA). Currently, the TGA balance is $722 billion.
The first major assumption is when politicians will agree to raise the debt ceiling. This will be the first test of whether Trump's support among Republican lawmakers is rock solid. It is important to note that Trump's governing advantage—the Republican majority over Democrats in the House and Senate—is very thin. There is a faction within the Republican Party that likes to stand tall and proud, claiming they care about shrinking the size of government every time the debt ceiling issue arises. They will insist on voting to raise the ceiling until they secure some benefits for their constituencies. Trump can no longer persuade them to veto the 2024 year-end spending bill without raising the debt ceiling; the Democrats suffered a severe defeat in the last election and are not in the mood to help Trump release government funds for his policy goals. Harris 2028 makes a comeback? Does anyone want to see this plot? In fact, the next Democratic presidential nominee will likely be Gavin Newsom. Therefore, to get the job done, Trump will wisely exclude the debt ceiling issue from any legislative proposals until absolutely necessary.
When failing to raise the debt ceiling leads to a technical default on maturing bonds or a complete government shutdown, raising the debt ceiling becomes necessary. Based on the Treasury's published 2024 revenue and expenditure situation, I estimate this will occur between May and June of this year, at which point the TGA balance will be completely exhausted.
Understanding the speed and intensity at which the TGA provides funding to the government helps predict when a reduction in funding will have the maximum effect. The market is forward-looking, and given that these are public data, and we know how the Treasury will operate when the account is close to exhaustion and cannot increase the total amount of Treasury bonds, the market will look for new sources of dollar liquidity. After exhausting 76%, March seems to be a time when the market will start asking 'What happens next?'
If we combine the dollar liquidity of the Federal Reserve and the Treasury by the end of the first quarter, the total will reach $612 billion.
What will happen next?
Once default and shutdown are imminent, an agreement will be reached at the last moment to raise the debt ceiling. At that point, the Treasury will again be free to net borrow and must refill the TGA. This is negative for dollar liquidity.
Another important date in the second quarter is April 15, which is the tax deadline. It is clear from the table above that the government's fiscal situation improves significantly in April, which is also negative for dollar liquidity.
If the factors affecting the TGA balance are the only determinants of cryptocurrency prices, then I expect to see a local peak at the end of the first quarter. In 2024, Bitcoin reached a local peak of about $73,000 in mid-March, then began to consolidate, and started a multi-month decline before the April 15 tax deadline.
Trading Strategy
The problem with this analysis is that it assumes dollar liquidity is the most critical marginal driver of the total liquidity of global fiat currencies. Here are some other influencing factors:
Will China accelerate or slow down the creation of RMB credit?
Will the Bank of Japan begin to raise its policy interest rates, thereby appreciating the dollar against the yen and unwinding leveraged arbitrage trades?
Will Trump and Scott significantly devalue the dollar against gold or other major fiat currencies overnight?
How efficient is the Trump team in rapidly reducing government spending and turning bills into law?
These significant macroeconomic issues cannot be known in advance, but I am confident in the mathematical calculations of RRP and TGA balances over time. My confidence is further supported by the market's performance from September 2022 to the present: the increase in dollar liquidity due to the decline in RRP balances directly led to the rise in cryptocurrencies and stocks, despite the Fed and other central banks raising interest rates at the fastest pace since 1980.
FFR upper limit (right, green) vs Bitcoin (right, magenta) vs S&P 500 index (right, yellow) vs RRP (left, white, inverted). Bitcoin and stocks rebounded off the bottom in September 2022, and the decline in RRP injected over $2 trillion of liquidity into global markets. This was a deliberate policy choice by Yellen to issue more Treasury bonds to consume deposit reserves. Powell's actions to tighten financial conditions in the fight against inflation were completely offset.
Considering all factors, I believe I have answered the initial question. That is, the market's disappointment with the effects of the Trump team's policy shift can be overshadowed by a very positive dollar liquidity environment, potentially increasing liquidity by as much as $612 billion in the first quarter. As in previous years, we will sell as scheduled at the end of the first quarter and relax on the beach, by the sea, or at a ski resort in the southern hemisphere, waiting for the return of a positive fiat liquidity environment in the third quarter.
As the Chief Investment Officer of Maelstrom, I will encourage the fund's adventurers to dial risk up to DEGEN (extreme). The first step in this direction is our decision to enter the thriving DeSci space. We like undervalued shitcoins and have purchased BIO, VITA, ATH, GROW, PSY, CRYO, and NEURON. For more on why Maelstrom believes the DeSci narrative is poised for revaluation, please read (Degen DeSci). If things develop as I describe, I will reduce my position at some point in March and then start having fun.
Of course, anything can happen, but overall I am bullish. Does this mean my viewpoint in the previous article has changed? Somewhat. Perhaps the sell-off that occurred due to disappointment with the impact of Trump's policy shift has already happened by the end of 2024, rather than mid-January 2025. Does this mean I am sometimes a poor predictor? Yes, but at least I absorb new information and perspectives and adjust in a timely manner before significant losses or missed opportunities occur.
This is why the investment game is so appealing. Imagine if you could hole in one every time you play golf, hit a three-pointer from half court every time you play basketball, and clear the table every time you play billiards. What would be the point of life? QTMD, failure and success are both necessary so you can derive joy from success, but I hope overall success can outnumber failure.
