Source: Arthur Hayes substack account

Author: Arthur Hayes

Translation: zhouzhou, BlockBeats

In this article, Hayes analyzes how U.S. dollar liquidity affects the cryptocurrency market, particularly the price movements of Bitcoin, by explaining the Federal Reserve's reverse repurchase agreements (RRP) and the cash flow of the Treasury General Account (TGA). He explores how an increase in dollar liquidity can drive up the cryptocurrency and stock markets. In the first quarter of 2025, approximately $612 billion in dollar liquidity will be injected, which may have a positive impact on 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.

Below is the original content (reorganized for better readability):

The remote ski entrances in Hokkaido's ski resorts offer excellent terrain, most of which can be easily accessed by cable car. At the beginning of each year, the biggest concern for skiers is whether there is enough snow to cover the entrances and whether they will be opened. A major challenge for skiers is "Sasa," which is the Japanese term for a type of bamboo plant.

This plant has stems as thin as reeds, but its leaves are sharp as knives, and a moment's inattention can lead to cuts on the skin. Skiing on "Sasa" is very dangerous because your ski edges may slip, leading to what I call a "man vs. tree" dangerous game. Therefore, if there is not enough snow to cover "Sasa," skiing in remote areas becomes extremely risky.

This year, Hokkaido has seen the highest snowfall in nearly 70 years, with an astonishing depth of powder snow. As a result, the backcountry ski entrances opened at the end of December, whereas in previous years, they typically opened in the first or second week of January.

As 2025 approaches, 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 Trump camp's policy actions may lead to disappointment, negatively impacting the short-term market. However, I must also weigh the stimulative effects of dollar liquidity.

Currently, Bitcoin's price fluctuates with the rhythm of dollar releases, as 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 out in the third quarter of 2022 when the Fed's reverse repurchase tool (RRP) peaked. Under the influence of Treasury Secretary Yellen (nicknamed "Bad Girl Yellen"), the U.S. 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 effectively injected liquidity into the global financial market. Consequently, the cryptocurrency and stock markets, especially large tech stocks listed in the U.S., surged significantly. The chart above shows the relationship between Bitcoin (left axis, yellow) and RRP (right axis, white, inverted): as RRP decreases, Bitcoin's price rises.

In the first quarter of 2025, I aim to answer whether the positive stimulus of dollar liquidity can overshadow the potential disappointment regarding the speed and effectiveness of Trump's so-called "pro-crypto" and "pro-business" policies. If so, market risks will become relatively controllable, and the Maelstrom fund should increase its risk exposure.

First, I will discuss the Federal Reserve, which is a minor consideration in my analysis. Then, I will focus on how the U.S. Treasury addresses the debt ceiling issue. If politicians delay raising the debt ceiling, the Treasury will draw on its funds in the Federal Reserve's General Account (TGA), injecting liquidity into the market and creating positive momentum for the crypto market.

For brevity, I will not explain in detail how RRP and TGA borrowing negatively and positively affect dollar liquidity, respectively. Please refer to "Teach Me, Daddy" for a detailed explanation of these mechanisms.

Federal Reserve

The Federal Reserve's quantitative tightening (QT) policy is progressing at a rate of $60 billion per month, meaning its balance sheet is shrinking. Currently, there has been no change in the Fed's forward guidance regarding the pace of QT. I will explain the reasons later in the article, but my prediction is that the market will peak in mid to late March, resulting in $180 billion of liquidity being withdrawn.

The reverse repurchase tool (RRP) has nearly dropped to zero, and to completely exhaust the funds in this tool, the Fed has delayed adjusting the RRP policy rate. At the meeting on December 18, 2024, the Fed 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 bound of the federal funds rate (FFR).

If you want to understand why the Fed waited until the RRP was nearly exhausted to adjust the rate to the lower bound of the FFR, thereby reducing the attractiveness of depositing funds into the 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, avoiding as much as possible stopping QT, providing supplementary leverage exemptions for U.S. commercial bank branches, 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 Fed, the yield on the 10-year U.S. Treasury cannot exceed 5%, as this level would trigger a significant increase in bond market volatility (MOVE index). As long as there is liquidity in the RRP and the Treasury General Account (TGA), the Fed does not need to make significant adjustments to its monetary policy or acknowledge that a fiscal dominance situation is occurring.

Fiscal dominance essentially makes 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 endearing nickname.

Once the Treasury General Account (TGA) is exhausted (which has a positive impact on dollar liquidity), and then replenished due to the debt ceiling being raised (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; it is merely a reflection of how the Fed's policy might evolve throughout 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 (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 issue is the speed at which the reverse repurchase tool (RRP) drops from about $237 billion to zero. I expect the 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-bill) to maximize returns. It should be particularly 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-bill) maturing within 12 months has exceeded 4.25% (white), which is the lower bound of the federal funds rate.

The Fed will reduce liquidity by $180 billion due to quantitative tightening (QT), while the adjustment of the reward rate by the Fed will lead to an additional reduction in the RRP balance, further pushing $237 billion of liquidity injection. This means a total net liquidity injection of $57 billion.

Treasury

"Bad Girl" Yellen has informed 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 Federal Reserve (which has a positive impact on dollar liquidity).

Since the total debt cannot increase until Congress raises the debt ceiling, the Treasury can only spend funds 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 Trump's support among Republican lawmakers. Remember his governance margins—i.e., the Republican majority over Democrats in the House and Senate is very slim.

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 already failed to persuade 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, anyone interested? In fact, the Democratic presidential candidate will be that silver-haired man, Gavin Newsom. Therefore, to push things forward, Trump will wisely keep the debt ceiling issue off the agenda until 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 crucial. Based on the Treasury's published 2024 revenue and expenditure data, I estimate that this situation will occur between May and June of this year, when the TGA balance will be completely exhausted.

Visualizing the usage speed and intensity of the TGA (Treasury General Account) helps predict the maximum effect moment for fund utilization, 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 the account is nearing exhaustion, the market will seek new sources of dollar liquidity. When the utilization rate reaches 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 terms and must 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 shown in the table above, 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 at the end of the first quarter. In 2024, Bitcoin reached a local high of around $73,000 in mid-March, then entered a consolidation phase and began a months-long decline before the tax due date on April 11.

Trading Strategy

The issue with this analysis is that it assumes dollar liquidity is the most critical marginal driver of global total legal 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 and unwind leveraged arbitrage trades?
• Will Trump and Bessent conduct large-scale 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 legislation?

These major macroeconomic issues cannot be predetermined, but I am confident in the mathematical model of how RRP and TGA balances change over time. My confidence is further validated, especially by the market's performance from September 2022 to now: the increase in dollar liquidity directly led to the rise of cryptocurrencies and stocks due to the decline in RRP balances, despite the Fed and other central banks raising interest rates at the fastest pace since the 1980s.

The FFR upper limit (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 influence of declining RRP, injecting over $2 trillion in dollar liquidity into the global market. This was a deliberate policy choice by "Bad Girl" Yellen to withdraw RRP by issuing more Treasuries. 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 of the Trump team failing to deliver on its 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 always the case, it will be time to sell at the end of the first quarter, take a break, go to the beach, nightclubs, or ski resorts in the Southern Hemisphere, and wait 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 risk to "DEGEN" (extreme risk) mode. The first step in this direction is our decision to venture into the emerging decentralized science (DeSci) field. We like undervalued junk coins and have purchased BIO, VITA, ATH, GROW, PSY, CRYO, and NEURON.

To understand why Maelstrom believes the DeSci narrative could be repriced higher, read "Degen DeSci." If things go as smoothly as I describe, I will adjust the benchmark in March and jump into the "909 Open Top 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 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 what makes the investment game 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.

免责声明：本文章仅代表作者个人观点，不代表本平台的立场和观点。本文章仅供信息分享，不构成对任何人的任何投资建议。用户与作者之间的任何争议，与本平台无关。如网页中刊载的文章或图片涉及侵权，请提供相关的权利证明和身份证明发送邮件到support@aicoin.com，本平台相关工作人员将会进行核查。