Written by: Arthur Hayes, Chief Investment Officer of Maelstrom Fund, co-founder and former CEO of BitMEX
Translated by: zhouzhou, BlockBeats
Editor’s Note: In this article, Hayes analyzes how dollar liquidity affects the cryptocurrency market, particularly the trend of Bitcoin, by explaining the Federal Reserve's reverse repurchase operations (RRP) and the funding flows of the U.S. Treasury account (TGA), exploring how increased dollar liquidity drives up cryptocurrencies and the stock market. In the first quarter of 2025, approximately $612 billion of dollar liquidity will be injected, which may positively impact the market. Finally, the author mentions that the Maelstrom fund is investing in the DeSci field and holds a bullish outlook for the future market.
The following is the original content (rearranged for reading comprehension):
The remote ski entrances in Hokkaido's ski resorts offer excellent terrain, most of which can be easily accessed by lifts. At the beginning of each year, the most concerning issue for skiing enthusiasts is whether there is enough snow to cover and open these entrances. A major dilemma for skiers is 'Sasa', which is the Japanese term for a type of bamboo plant.
The stem of this plant is as thin as a reed, but its leaves are sharp as knives, and one can easily cut their skin if not careful. Skiing on 'Sasa' is very dangerous because your ski edges may slip, leading to a dangerous game I call 'man vs. tree'. Therefore, skiing in remote areas is highly risky if the snow is insufficient to cover the 'Sasa'.
This year, Hokkaido's snowfall reached a nearly 70-year high, with incredible powder snow. Therefore, the backcountry ski entrances opened at the end of December, whereas they usually open in the first or second week of January.
As 2025 approaches, investors are shifting their focus from skiing to the crypto market, particularly whether the 'Trump market' can continue. In my latest article (Trump Truth), I propose that the market's high expectations for the Trump camp's policy actions may lead to disappointment, negatively impacting the short-term market. But at the same time, I must weigh the stimulative effect of dollar liquidity.
Currently, Bitcoin's trend fluctuates with the pace of dollar release, as the financial elites of the Federal Reserve (Fed) and the U.S. Treasury hold the power to determine the amount of dollars supplied to the global financial market, which is a significant factor affecting the market.
Bitcoin bottomed in the third quarter of 2022, when the Federal Reserve's reverse repurchase tool (RRP) peaked. Under the push of U.S. Treasury Secretary Yellen (nicknamed 'Bad Girl Yellen'), the Treasury reduced the issuance of long-term coupon bonds while increasing the issuance of short-term zero-coupon bonds, thus withdrawing over $2 trillion from the RRP.
This actually injected liquidity into the global financial markets. The cryptocurrency and stock markets, especially large tech stocks listed in the U.S., surged as a result. The relationship between Bitcoin (left axis, yellow) and RRP (right axis, white, inverted) is shown in the chart above: as RRP decreases, Bitcoin prices rise.
In the first quarter of 2025, the question I tried to answer is whether the positive stimulus of dollar liquidity can overshadow the potential disappointment in the speed and effectiveness of Trump’s so-called 'pro-cryptocurrency' and 'pro-business' policies. If so, market risks will become relatively manageable, and the Maelstrom fund should increase its risk exposure.
First, I will discuss the Federal Reserve, which is a small consideration in my analysis. Next, I will focus on how the U.S. Treasury responds to the debt ceiling issue. If politicians delay raising the debt ceiling, the Treasury will draw on its checking account (TGA) funds at the Federal Reserve, which will inject liquidity into the market and create positive momentum for the crypto market.
For the sake of brevity, the negative and positive impacts of RRP and TGA borrowing on dollar liquidity will not be explained in detail. Please refer to the article (Teach Me, Dad) for a detailed understanding of how these mechanisms work.
The Federal Reserve
The Federal Reserve's quantitative tightening (QT) policy is progressing at a pace of $60 billion per month, meaning its balance sheet is shrinking. Currently, there has been no change in the Federal Reserve's forward guidance on the speed of QT, and I will explain the reasons later in the article, but my prediction is that the market will peak in mid to late March, thus withdrawing $180 billion of liquidity.
The reverse repurchase tool (RRP) has nearly dropped to zero; the Federal Reserve has delayed adjusting the policy interest rate for RRP in order to completely exhaust the funds of this tool. At the December 18, 2024 meeting, the Federal Reserve lowered the RRP rate by 0.30%, which is 0.05% more than the decrease in the policy rate. This move aims to link the RRP rate to the lower limit of the federal funds rate (FFR).
If you want to understand why the Federal Reserve waits until the RRP is nearly exhausted to adjust rates to the lower limit of the FFR, thereby reducing the attractiveness of depositing funds into the RRP, I suggest reading Zoltan Pozar's article (Cheating on Cinderella). My conclusion from this article is that the Federal Reserve is exhausting all tools to enhance demand for U.S. Treasury issuance while avoiding stopping QT, providing supplemental leverage ratio exemptions to U.S. commercial bank branches again, or restarting quantitative easing (QE), i.e., 'restarting the money printer.'
Currently, there are two pools of funds that will help suppress the rise in bond yields. For the Federal Reserve, the yield on 10-year U.S. Treasury bonds cannot exceed 5%, as this level would trigger a significant rise in bond market volatility (MOVE index). As long as there is liquidity in the RRP and the Treasury General Account (TGA), the Federal Reserve does not need to make significant adjustments to its monetary policy, nor does it need to acknowledge that a fiscal-led situation is occurring.
Fiscal dominance essentially makes Powell's position subordinate to 'Bad Girl Yellen', and after January 20, he will be subordinate to Scott Bessent. As for Scott, I haven't thought of a suitable nickname for him. If his decisions turn me into a modern-day Scrooge McDuck due to dollar depreciation against gold, I will give him a more likable nickname.
Once the Treasury General Account (TGA) is exhausted (which positively impacts dollar liquidity), it will be replenished after being raised due to the debt ceiling hit (which negatively impacts dollar liquidity), and the Federal Reserve will exhaust its emergency measures, unable to prevent yields from inevitably rising further after the easing cycle that began in September of last year.
This has little impact on the dollar liquidity situation in the first quarter, just a reflection on how Federal Reserve policy might evolve over the year if yields continue to rise.
The upper limit of the federal funds rate (FFR, right axis of the chart, white, inverted) and the yield on U.S. 10-year Treasury bonds (left axis, yellow) clearly show that while the Federal Reserve lowered interest rates in the face of inflation rates exceeding its 2% target, bond yields rose.
The real issue is the speed at which reverse repurchase tool (RRP) drops from about $237 billion to zero. I expect RRP to approach zero at some point in the first quarter, as money market funds (MMF) withdraw funds and purchase higher-yielding Treasury bills (T-bills) to maximize returns. It needs to be particularly clear that this means that $237 billion of dollar liquidity will be injected in the first quarter.
After the RRP rate change on December 18, the yield on Treasury bills (T-bills) maturing within 12 months has exceeded 4.25% (white), which is the lower limit of the federal funds rate.
The Federal Reserve will reduce liquidity by $180 billion due to quantitative tightening (QT), while also pushing an additional $237 billion of liquidity injection due to the decrease in RRP balances resulting from the Federal Reserve adjusting reward rates. This means a total net liquidity injection of $57 billion.
Treasury
'Bad Girl' Yellen tells the market that she expects the Treasury to begin taking 'extraordinary measures' to fund the U.S. government between January 14 and 23. The Treasury has two options to pay government bills: either issue debt (which negatively impacts dollar liquidity) or spend funds from its checking account at the Federal Reserve (which positively impacts dollar liquidity).
Since the total debt cannot increase until Congress raises the debt ceiling, the Treasury can only spend funds from its checking account, the 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 Trump's first test of support among Republican lawmakers. Remember his governance margin—Republicans in the House and Senate have a very slim majority over the Democrats.
Some Republicans like to puff out their chests and act high and mighty, claiming to care about reducing the size of the bloated government every time the debt ceiling issue is discussed. They will delay voting to support raising the debt ceiling until they secure some hefty returns for their constituencies.
Trump has failed to convince them that if the debt ceiling is not raised, he will veto the spending bill for the end of 2024. Democrats, having experienced a 'gender-neutral bathroom' style defeat in the last election, are unlikely to help Trump unlock government funds to achieve his policy goals.
Harris 2028, are you interested? In fact, the Democratic presidential candidate will be that silver-haired man Gavin Newsom. Therefore, to move things along, Trump will wisely include the debt ceiling issue in the agenda only when absolutely necessary before proposing any legislation.
When not raising the debt ceiling leads to a technical default on maturing Treasuries or a complete government shutdown, raising the debt ceiling becomes critical. Based on the 2024 revenue and expenditure data released by the Treasury, I estimate this situation will occur between May and June this year, by which time the TGA balance will be completely exhausted.
Visualizing the speed and intensity of TGA (Treasury General Account) usage aids in predicting the moments of maximum effect for fund utilization, as the market is forward-looking. Given that this data is public, and we know that when the Treasury cannot increase the total U.S. debt and the account is close to depletion, the market will seek new sources of dollar liquidity. When the usage rate hits 76%, March seems to be the moment when the market will ask 'What’s next?'
If we add the total dollar liquidity from the Federal Reserve and the Treasury by the end of the first quarter, it amounts to $612 billion.
What happens next?
Once default and shutdown are imminent, a last-minute agreement will be reached to raise the debt ceiling. By then, the Treasury will be able to borrow again in net borrowing terms and will need to refill the TGA. This will have a negative impact on dollar liquidity.
Another important date in the second quarter is April 15, when taxes are due. As seen from the table above, the government's finances improved significantly in April, which is negative for dollar liquidity.
If the factors affecting the TGA balance are the only determinants of cryptocurrency prices, I expect a local market top to occur at the end of the first quarter. In 2024, Bitcoin reached a local high of about $73,000 in mid-March, then entered a consolidation phase and began a few months of decline before the tax payment due date on April 11.
Trading strategy
The problem with this analysis is that it assumes dollar liquidity is the most critical marginal driver of total global fiat liquidity. Here are some other considerations:
Will China accelerate or slow down the creation of renminbi credit?
Will the Bank of Japan start raising interest rates, which would appreciate the dollar-yen exchange rate and unwind leveraged arbitrage trades?
Will Trump and Bessent carry out a massive overnight devaluation of the dollar relative to gold or other major fiat currencies?
How efficient is the Trump team in rapidly reducing government spending and passing legislation?
These major macroeconomic issues cannot be predetermined, but I am confident in my mathematical model of how RRP and TGA balances change over time. My confidence is further validated, especially from the performance of the market from September 2022 to now: the increase in dollar liquidity directly resulting from the decrease in RRP balances has driven up cryptocurrencies and stocks, despite the Federal Reserve and other central banks raising interest rates at the fastest pace since the 1980s.
The FFR ceiling (right side, green) compared to Bitcoin (right side, magenta) and the S&P 500 index (right side, yellow) and RRP (left side, white, inverted). Bitcoin and stocks bottomed in September 2022 and rebounded due to the decline in RRP, injecting over $2 trillion of dollar liquidity into the global market. This was 'Bad Girl' Yellen's deliberate policy choice to draw on RRP by issuing more Treasuries. Powell's financial tightening actions to address inflation have completely failed.
Despite various warnings, I believe I have answered the initial question I posed. That is, the disappointment over the Trump team's failure to deliver on proposed legislation supporting cryptocurrencies and business can be offset by an extremely positive dollar liquidity environment, with dollar liquidity in the first quarter increasing by as much as $612 billion.
As is almost every year, it is planned that the end of the first quarter will be the time to sell, take a break, and head to the beach, nightclubs, or ski resorts in the southern hemisphere, waiting for the dollar liquidity conditions to improve again in the third quarter.
As the Chief Investment Officer of Maelstrom, I will encourage risk-takers in the fund to adjust their risks to 'DEGEN' (extreme risk) mode. The first step in this direction is our decision to enter the emerging decentralized science (DeSci) field. We like undervalued junk coins and have purchased BIO, VITA, ATH, GROW, PSY, CRYO, NEURON.
For a deeper understanding of why Maelstrom believes the DeSci narrative could be repriced higher, please read (Degen DeSci). If things go as I describe, I will adjust the benchmark in March and jump into the '909 Open High Hat' phase. Of course, anything can happen, but overall I am bullish.
Perhaps Trump's market sell-off occurs from mid-December 2023 to the end of 2024, rather than in mid-January 2025. Does that mean I am sometimes a bad forecaster? Yes, but at least I can absorb new information and opinions and make adjustments before they lead to significant losses or missed opportunities.
This is why the investment game is intellectually engaging. Imagine how boring life would be if you could hole-in-one every time you hit the ball, make every three-pointer in basketball, and sink every shot in billiards.
