Original Author: Arthur Hayes, Chief Investment Officer of Maelstrom Fund, Co-founder and former CEO of BitMEX Original Translation: zhouzhou, BlockBeats
Editor's note: In this article, Hayes analyzes how dollar liquidity affects the cryptocurrency market, particularly the price movements of Bitcoin, by explaining the Fed's reverse repurchase operations (RRP) and the flow of funds in the Treasury General Account (TGA). An injection of approximately $612 billion of dollar liquidity in the first quarter of 2025 could have a positive impact on the market. Finally, the author mentions that the Maelstrom fund is investing in the DeSci field and maintains a bullish outlook for the future market.
The following is the original content (edited for readability):
The remote ski entry points in Hokkaido's ski resorts offer excellent terrain, most of which can be easily accessed via cable cars. At the beginning of each year, the main concern for ski enthusiasts is whether the snow cover is sufficient to open these entry points. A major dilemma for skiers is 'Sasa', which is the Japanese term for a type of bamboo plant.
The stems of this plant are as thin as reeds, but the leaves are sharp as knives, and a moment's inattention can cut the skin. Skiing on 'Sasa' is very dangerous because your snowboard edges may slip, leading to what I call a dangerous game of 'man versus tree.' Therefore, if the snow cover is insufficient to cover 'Sasa', skiing in remote areas becomes extremely risky.
This year, Hokkaido's snowfall reached a near 70-year high, with astonishingly deep powder. As a result, backcountry ski entry points opened by the end of December, whereas in previous years they usually opened in the first or second week of January.
As we approach 2025, investors are shifting their focus from skiing to the cryptocurrency market, particularly whether the 'Trump rally' can continue. In my latest article (Trump Truth), I suggest that the market's high expectations for the policy actions of the Trump camp may lead to disappointment, negatively impacting the short-term market. However, at the same time, I must also weigh the stimulating effect of dollar liquidity.
Currently, Bitcoin's movement fluctuates with the rhythm of the dollar being released, with the financial leaders of the Fed and the U.S. Treasury holding the power to decide the amount of dollars supplied to the global financial market, which is a key factor affecting the market.
Bitcoin bottomed out in the third quarter of 2022, when the Fed's reverse repurchase tool (RRP) peaked. Under the influence 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, drawing over $2 trillion from the RRP.
This actually injects liquidity into the global financial markets. The cryptocurrency and stock markets, especially large tech stocks listed in the U.S., have risen significantly as a result. As shown in the chart above, the relationship between Bitcoin (left axis, yellow) and RRP (right axis, white, inverted): as RRP decreases, the price of Bitcoin rises.
In the first quarter of 2025, the question I am trying to answer is whether the positive stimulus of dollar liquidity can overshadow the potential disappointment in the implementation speed and effectiveness of Trump’s so-called 'pro-cryptocurrency' and 'pro-business' policies. If so, then market risks will become relatively manageable, and the Maelstrom fund should increase its risk exposure.
First, I will discuss the Fed, which is a minor consideration in my analysis. Then, 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 use its funds in the Federal Reserve's general account (TGA), which will inject liquidity into the market and create positive momentum for the cryptocurrency 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 (Teach Me, Dad) for specific mechanisms of how these work.
The Federal Reserve
The Fed's quantitative tightening (QT) policy is advancing at a rate of $60 billion per month, which means its balance sheet is shrinking. Currently, there has been no change in the Fed's forward guidance on the pace of QT, and I will explain the reasons in the later part of the article. However, 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 almost fallen to zero, and to completely exhaust the funding of this tool, the Fed has been slow to adjust the RRP policy interest rate. At the December 18, 2024 meeting, the Fed lowered the RRP rate by 0.30%, which is 0.05% more than the reduction 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 Fed waited until RRP was nearly exhausted before adjusting rates to the lower limit of the FFR, thus reducing the attractiveness of putting funds into RRP, I recommend reading Zoltan Pozar's article (Cheating on Cinderella). My conclusion from this article is that the Fed is exhausting all tools to enhance demand for U.S. Treasury issuance, trying to avoid stopping QT, providing supplementary leverage exemptions to U.S. commercial bank branches again, or restarting quantitative easing (QE), i.e., 'restarting the money printing machine.'
Currently, there are two pools of funds that will help suppress the rise in bond yields. For the Fed, the yield on the 10-year U.S. Treasury bond cannot exceed 5%, as this level would trigger a significant increase in bond market volatility (MOVE index). As long as there is still liquidity in the RRP and the Treasury General Account (TGA), the Fed does not need to make significant adjustments to its monetary policy nor acknowledge that a situation of fiscal dominance is occurring.
Fiscal dominance will essentially make Powell's position appear subordinate to 'bad girl Yellen', and after January 20, it will be subordinate to Scott Bessent. As for Scott, I haven't thought of a suitable nickname for him yet. If his decisions turn me into a modern-day Scrooge McDuck due to the depreciation of the dollar against gold, I will give him a more likable nickname.
Once the Treasury General Account (TGA) is depleted (which has a positive impact on dollar liquidity), and then replenished after being raised due to hitting the debt ceiling (which has a negative impact on dollar liquidity), the Fed will exhaust its emergency measures and will not be able to prevent yields from inevitably rising further after the easing cycle that began last September.
This has little impact on the dollar liquidity situation in the first quarter, just a reflection on how the Fed's policy might evolve over the year if yields continue to rise.
The upper limit of the federal funds rate (FFR, right axis, white, inverted) and the yield on the 10-year U.S. Treasury bond (left axis, yellow) clearly show that when the Fed lowers rates in the face of inflation above its 2% target, bond yields rise.
The real question is the speed at which the reverse repurchase tool (RRP) falls from about $237 billion to zero. I expect RRP to approach zero at some point in the first quarter as money market funds (MMFs) withdraw funds and purchase higher-yielding Treasury bills (T-bills) to maximize returns. It needs to be made clear that this means $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 surpassed 4.25% (white), which is the lower limit of the federal funds rate.
The Fed will reduce liquidity by $180 billion due to quantitative tightening (QT) while an additional $237 billion will be pushed into liquidity due to the reduction in RRP balance caused by the Fed adjusting reward rates. This means a total net liquidity injection of $57 billion.
U.S. Treasury
'Bad girl' Yellen has told 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 has a negative impact on dollar liquidity) or spend funds from its checking account at the Fed (which has a positive impact on dollar liquidity).
Since the total debt cannot increase before the debt ceiling is raised in Congress, the Treasury can only spend funds from its checking account TGA. Currently, the TGA balance is $722 billion. The first major assumption is when the politicians will agree to raise the debt ceiling. This will be the first test of Trump's support among Republican lawmakers. Remember his governance margin—i.e., the Republican majority in the House and Senate is very slim against the Democrats.
Some Republicans like to puff out their chests and strut, 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 persuade them to veto the spending bill for the end of 2024 if the debt ceiling is not raised. Democrats, after experiencing a 'gender-neutral bathroom' style defeat in the last election, are unlikely to help Trump unlock government funding to achieve his policy goals.
Harris 2028, is everyone interested? In fact, the Democratic presidential candidate will be that silver-haired man Gavin Newsom. Therefore, to push things forward, Trump will wisely include the debt ceiling issue on the agenda only when absolutely necessary until then.
When not raising the debt ceiling may lead to a technical default on maturing government bonds or a complete government shutdown, raising the debt ceiling becomes crucial. According to the 2024 revenue and expenditure data released by the Treasury, I estimate that this situation will occur between May and June of this year, when the TGA balance will be completely depleted.
Visualizing the speed and intensity of TGA (Treasury Account) usage helps predict the maximum effect moment of fund usage, as the market is forward-looking. Given that this data is publicly available, and we know that when the Treasury cannot increase the total U.S. debt and its account is close to depletion, the market will look for new sources to obtain dollar liquidity. When the usage rate reaches 76%, March seems to be the moment the market will ask 'when's the next time?'
If we add the total dollar liquidity amount from the Fed and the Treasury by the end of the first quarter, it totals $612 billion.
What will happen 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 on a net basis and must refill the TGA. This will have a negative impact on dollar liquidity.
Another important date in the second quarter is April 15, the tax payment deadline. As shown in the table, government finances improve 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 appear by the end of the first quarter. In 2024, Bitcoin reached a local peak of about $73,000 in mid-March, then entered a period of consolidation, and began a few months of decline before the tax payment deadline on April 11.
Trading Strategy
The problem with this analysis is that it assumes dollar liquidity is the most critical marginal driver of global total statutory 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 cause the dollar-yen to appreciate and unravel leveraged arbitrage trades?
Will Trump and Bessent conduct a massive overnight devaluation of the dollar against gold or other major fiat currencies?
How efficient is the Trump team in rapidly reducing government spending and passing bills?
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 market's performance from September 2022 to now: the decrease in RRP balance directly led to an increase in dollar liquidity, which in turn drove up cryptocurrency and stock prices, even as the Fed and other central banks raised rates at the fastest pace since the 1980s.
The upper limit of the FFR (right side, green) compared to Bitcoin (right side, magenta) and the S&P 500 index (right side, yellow) with RRP (left side, white, inverted). Bitcoin and stocks bottomed out in September 2022 and rebounded under the impetus of the RRP decline, with over $2 trillion of dollar liquidity injected into the global market. This was the deliberate policy choice of 'bad girl' Yellen, drawing from the RRP by issuing more government bonds. Powell's financial tightening actions to combat inflation have completely failed.
Despite various warnings, I believe I have answered the initial question I posed. That is, the disappointment in the Trump team's failure to deliver on its proposed legislation supporting cryptocurrency and business can be compensated by an extremely positive dollar liquidity environment, with a potential increase in dollar liquidity in the first quarter reaching up to $612 billion.
As almost every year, as planned, the end of the first quarter will be a 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 in the third quarter.
As the Chief Investment Officer of Maelstrom, I will encourage risk-takers in the fund to adjust their risk to 'DEGEN' (extreme risk) mode. The first step in this direction is our decision to enter the emerging field of decentralized science (DeSci). We like undervalued junk coins and have bought BIO, VITA, ATH, GROW, PSY, CRYO, NEURON.
To understand why Maelstrom believes the DeSci narrative has the potential to be repriced higher, please read (Degen DeSci). If things go as smoothly 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 between mid-December 2023 and the end of 2024, rather than mid-January 2025. Does that mean I am sometimes a poor predictor? Yes, but at least I can absorb new information and opinions and adjust before they lead to significant losses or missed opportunities.
This is why investing is intellectually engaging. Imagine how boring life would be if you could hole-in-one every time you swung, make every three-pointer in basketball, or sink every shot in billiards.
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