Analysis of the Impact of US Dollar Liquidity on Crypto Assets Market

Recently, investors' attention has shifted from skiing to the crypto market, especially regarding whether "the market of a certain political figure" can be sustained. Although high expectations for certain policy actions may lead to disappointment and negatively impact the short-term market, it is also important to weigh the stimulating effect of dollar liquidity.

Currently, the trend of Bitcoin fluctuates with the rhythm of the dollar's release. The Federal Reserve and the U.S. Treasury control the dollar supply in the global financial markets, which is a key factor affecting the market.

Bitcoin hit bottom in the third quarter of 2022, when the Federal Reserve's reverse repurchase tool (RRP) peaked. Subsequently, the U.S. Treasury reduced the issuance of long-term coupon bonds and increased the issuance of short-term zero-coupon bonds, withdrawing over $2 trillion from RRP. This effectively injected liquidity into the global financial markets, driving a significant rise in Crypto Assets and stock markets, particularly large tech stocks listed in the U.S.

In the first quarter of 2025, the key issue is whether the positive stimulus of US dollar Liquidity can offset the disappointment that may arise from the speed and effectiveness of certain policy implementations. If so, market risks will be relatively controllable, and investment funds should also increase their risk exposure.

The Federal Reserve's quantitative tightening ( QT ) policy is advancing at a pace of $60 billion per month, which means that its balance sheet size is shrinking. The market is expected to peak in mid to late March, when approximately $180 billion in Liquidity will be drained.

The reverse repurchase tool ( RRP ) has nearly dropped to zero. The Federal Reserve lowered the RRP rate by 0.30% at the meeting on December 18, 2024, which is 0.05% more than the reduction in the policy rate, aiming to link the RRP rate to the lower bound of the federal funds rate ( FFR ).

Currently, there are two funding pools that help to suppress the rise in bond yields. For the Federal Reserve, the yield on the 10-year U.S. Treasury cannot exceed 5%, otherwise it will trigger a significant increase in bond market volatility. 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 monetary policy.

Once the TGA is depleted and replenished after the debt ceiling is raised, the Federal Reserve will exhaust emergency measures and will be unable to prevent yields from inevitably rising further following the easing cycle that began last September.

It is expected that the RRP will approach zero at some point in the first quarter, which means that $237 billion in USD liquidity will be injected. The Federal Reserve will reduce liquidity by $180 billion due to QT, while the decrease in RRP balance will further drive an injection of $237 billion in liquidity, resulting in a total net injection of $57 billion.

On the part of the Treasury, since the total debt cannot increase before raising the debt ceiling, the Treasury can only spend funds from the TGA. The current TGA balance is $722 billion. The debt ceiling issue is expected to become critical between May and June of this year, at which point the TGA balance will be completely depleted.

The total dollar Liquidity from the Federal Reserve and the Treasury is expected to reach $612 billion by the end of the first quarter. If this is the only factor determining Crypto Assets prices, a local market top is expected by the end of the first quarter.

However, other factors need to be considered, such as the credit creation of the Chinese yuan, the Bank of Japan's policies, potential dollar depreciation, as well as government spending and legislative efficiency. Nevertheless, past market performance has validated the direct impact of changes in RRP and TGA balances on Crypto Assets and the stock market.

Overall, the positive dollar liquidity environment in the first quarter may offset some of the disappointment from policies not being implemented as expected. As is customary, the end of the first quarter may be a time for profit-taking, waiting for the dollar liquidity conditions to improve again in the third quarter.

A certain investment fund is entering the emerging decentralized science ( DeSci ) field, optimistic about the development prospects of this area. Overall, the market outlook is optimistic, but investors should stay alert for new information and adjust their strategies in a timely manner.