How Dollar Liquidity Affects Crypto Assets Market

Recently, the trend of the Crypto Assets market is closely related to the liquidity of the US dollar. The policies of the Federal Reserve and the US Treasury determine the dollar supply in the global financial market, which has a significant impact on the market.

Bitcoin hit bottom in the third quarter of 2022, while the Federal Reserve's Reverse Repurchase Agreement (RRP) peaked. Subsequently, the U.S. Treasury reduced the issuance of long-term bonds and increased the issuance of short-term zero-coupon bonds, drawing over $2 trillion from the RRP, injecting liquidity into the global financial markets. This drove the rise in Crypto Assets and stock markets, especially large U.S. tech stocks.

In the first quarter of 2025, the positive stimulus of US dollar Liquidity may offset the market's potential disappointment regarding the speed and effectiveness of certain policy implementations. If politicians delay in raising the debt ceiling, the Treasury will tap into its funds in the Federal Reserve's General Account (TGA), which will inject Liquidity into the market and create positive momentum for the Crypto Assets market.

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 The market is expected to peak around mid to late March, when approximately $180 billion in Liquidity will be withdrawn.

The reverse repurchase agreement (RRP) tool is nearly exhausted. The Federal Reserve lowered the RRP rate by 0.30% at the December 2024 meeting, aiming to link it to the lower bound of the federal funds rate (FFR). Currently, the liquidity in RRP and the Treasury General Account (TGA) helps to suppress rising bond yields.

Once the TGA is exhausted and replenished after the debt ceiling is raised, the Federal Reserve will run out of emergency measures and will be unable to stop yields from rising further after the easing cycle that began in September last year. This has little impact on dollar liquidity in the first quarter, but it may affect the direction of Federal Reserve policy for the year.

The expected RRP will approach zero at some point in the first quarter as money market funds withdraw funds and purchase higher-yielding Treasury bills. This means that approximately $237 billion of dollar liquidity will be injected in the first quarter.

Considering comprehensively, the Federal Reserve will reduce liquidity by $180 billion due to QT, while the decrease in RRP balance will drive a liquidity injection of $237 billion, totaling a net injection of $57 billion.

On the part of the Treasury, due to the debt ceiling restrictions, funds can only be spent from the TGA. The current TGA balance is $722 billion. It is expected that between May and June, not raising the debt ceiling may lead to a technical default on government bonds or a government shutdown.

By the end of the first quarter, the total dollar liquidity of the Federal Reserve and the Treasury is expected to reach $612 billion. Once defaults and shutdowns approach, a last-minute agreement may be reached to raise the debt ceiling. At that point, the Treasury will be able to re-borrow and replenish the TGA, which will negatively impact dollar liquidity.

April 15 is another important date, as tax payments due will improve the government's financial condition, which is also negative for USD Liquidity. If the change in TGA balance is the only factor determining Crypto Assets prices, a local market top is expected by the end of the first quarter.

However, other factors also need to be considered, such as the credit creation of China's Renminbi, the policies of the Bank of Japan, the possibility of dollar depreciation, as well as government spending and legislative efficiency. Despite the uncertainties, past market performance has validated the 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 in the market. As is customary, the end of the first quarter may be a time for profit-taking while waiting for the dollar liquidity conditions to improve again in the third quarter.

In this context, certain funds are adjusting their risk preferences and entering the emerging field of decentralized science (DeSci), purchasing some undervalued tokens. Although predictions are not always accurate, the ability to adjust strategies in a timely manner based on new information is still key in the investment game.