Author: Arthur Hayes, Chief Investment Officer of Maelstrom Funds, Co-founder and former CEO of BitMEX
Compiled by: zhouzhou, BlockBeats
Editor's Note: In this article, Hayes analyzes how the liquidity of the US dollar affects the cryptocurrency market, especially the trend of Bitcoin. By explaining the reverse repurchase operation (RRP) of the Federal Reserve and the flow of funds in the US Treasury Account (TGA), he explores how the increase in US dollar liquidity drives the rise of the cryptocurrency and stock markets. In the first quarter of 2025, the US dollar liquidity will be injected with about $612 billion, which may have a positive impact on the market. Finally, the author mentioned that the Maelstrom Fund is investing in the DeSci field and is bullish on the future market.
The following is the original content (for easier reading and understanding, the original content has been reorganized):
Backcountry ski access in Hokkaido ski resorts offers great terrain, most of which are easily accessible by cable car. At the beginning of each year, the biggest concern for skiers is whether there will be enough snow to open these access points. A big problem for skiers is "Sasa", which is the Japanese name for a bamboo plant.
The stems of this plant are thin like reeds, but the leaves are sharp as knives, which can cut your skin if you are not careful. Skiing on a sashima is very dangerous because your ski edge can slip, and then you start a dangerous game I call "man vs. tree". Therefore, if the snow is not enough to cover the sashima, backcountry skiing is very risky.
Hokkaido's snowfall this year hit a 70-year high, with incredibly deep powder snow, so the back mountain ski entrance opened in late December, compared to the first or second week of January in previous years.
As 2025 approaches, investors’ focus has shifted from skiing to the crypto market, especially whether the “Trump rally” can continue. In my latest article, “Trump Truth,” I suggested that high market expectations for the Trump camp’s policy actions could lead to disappointment and have a negative impact on the short-term market. But at the same time, I must also weigh the stimulating effect of US dollar liquidity.
Currently, the trend of Bitcoin fluctuates with the rhythm of the release of the US dollar. The financial top brass of the Federal Reserve (Fed) and the US Treasury Department hold the power to decide the amount of US dollars supplied to the global financial market, which is an important factor affecting the market.
Bitcoin bottomed in the third quarter of 2022, when the Fed’s reverse repo facility (RRP) peaked. Under the impetus of U.S. Treasury Secretary Janet 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, thereby withdrawing more than $2 trillion from the RRP.
This actually injected liquidity into the global financial market. Cryptocurrency and stock markets, especially large technology stocks listed in the United States, rose sharply as a result. From the chart above, we can see the relationship between Bitcoin (left axis, yellow) and RRP (right axis, white, inverted): as RRP decreases, Bitcoin price rises.
The question I am trying to answer in the first quarter of 2025 is whether the positive stimulus of US dollar liquidity can mask the potential disappointment in the speed and effectiveness of Trump's so-called "pro-cryptocurrency" and "pro-business" policies. If so, then market risks will become relatively controllable, and Maelstrom Funds should also increase risk exposure.
First, I will discuss the Federal Reserve, which is a minor consideration in my analysis. Subsequently, I will focus on how the U.S. Treasury will respond to the debt ceiling issue. If politicians drag their feet on raising the debt ceiling, the Treasury will use its general 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, I will not explain in detail how RRP and TGA lending have negative and positive effects on USD liquidity respectively. Please refer to the article "Teach Me, Daddy" to understand the specific working principles of these mechanisms.
Fed
The Fed’s quantitative tightening (QT) policy is progressing at a rate of $60 billion per month, which means that the size of its balance sheet is shrinking. At present, the Fed’s forward guidance on the rate of QT has not changed, and I will explain why later in the article, but my prediction is that the market will peak in mid-to-late March, so $180 billion of liquidity will be withdrawn.
The reverse repurchase facility (RRP) has almost fallen to zero, and in order to completely drain the funds of the facility, the Fed belatedly adjusted the policy rate of the RRP. At the meeting on December 18, 2024, the Fed cut the RRP rate by 0.30%, 0.05% more than the reduction in the policy rate. This move is intended 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 the RRP was almost exhausted before adjusting the interest rate to the lower limit of the FFR, thereby reducing the attractiveness of depositing funds in the RRP, I recommend reading Zoltan Pozar's article "Cheating on Cinderella". My conclusion from this article is that the Fed is using all its tools to enhance demand for US Treasury issuance, avoiding as much as possible stopping QT, providing supplementary leverage ratio exemptions for US commercial bank branches again, or restarting quantitative easing (QE), that is, "restarting the printing press."
Currently, there are two pools of funds that will help to curb the rise in bond yields. For the Fed, the 10-year Treasury yield cannot exceed 5%, because this level will trigger a sharp 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 significantly adjust its monetary policy or admit that a fiscal-led situation is happening.
Fiscal dominance essentially puts Powell in a position subordinate to “bad girl Yellen” and, after January 20, to Scott Bessent. As for Scott, I haven’t come up with a nickname for him yet. If his decision-making turns me into a modern-day Scrooge McDuck due to the devaluation of the dollar against gold, I’ll give him a more flattering nickname.
Once the Treasury General Account (TGA) is drained (with a positive impact on USD liquidity) and subsequently replenished by the debt ceiling being raised (with a negative impact on USD liquidity), the Fed will have exhausted its emergency measures and will be unable to prevent the inevitable further rise in yields after the easing cycle that began in September last year.
This has little impact on USD liquidity conditions in the first quarter, but is just a casual thought on how Fed policy might evolve over the course of the year if yields continue to rise.
The Federal Funds Rate Cap (FFR, right axis, white, inverted) and the U.S. 10-year Treasury yield (left axis, yellow) clearly show that when the Federal Reserve cuts interest rates in the face of inflation above its 2% target, bond yields rise.
The real question is the speed at which the Reverse Repo Facility (RRP) has fallen from about $237 billion to zero. I expect the RRP to be close to zero at some point in the first quarter as money market funds (MMFs) maximize returns by withdrawing funds and buying higher-yielding Treasury bills (T-bills). To be clear, this means $237 billion of USD liquidity will be injected in the first quarter.
After the December 18 RRP rate change, the yield on Treasury bills (T-bills) maturing in 12 months or less 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), and will also drive an additional $237 billion in liquidity injections due to the reduction in RRP balances caused by the Fed's adjustment of the reward rate. This means a net liquidity injection of $57 billion in total.
Ministry of Finance
“Bad girl” Yellen 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 the 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 be increased until the U.S. Congress raises the debt ceiling, the Treasury can only spend money from its checking account, the TGA. Currently, the balance of the TGA is $722 billion. The first big assumption is when politicians agree to raise the debt ceiling. This will be the first test of Trump's support among Republican lawmakers. Remember his governing margins - that is, the Republican-Democratic majorities in the House and Senate are very thin.
There is a segment of the Republican Party that likes to puff itself up and swagger, claiming that it cares about reducing the size of bloated government every time the debt ceiling is discussed, and that they will hold off on voting to increase the debt ceiling until they have secured some big payoff for their constituencies.
Trump has already failed to convince them to veto a spending bill in late 2024 if the debt ceiling is not raised. Democrats, after their “gender-neutral bathroom” fiasco 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. So in order to move things forward, Trump would be wise to put the debt ceiling issue on the agenda until it is absolutely necessary before proposing any legislation.
Raising the debt ceiling becomes critical when failure to do so would result in a technical default on maturing Treasury bonds or a complete government shutdown. Based on the Treasury Department’s 2024 revenue and expenditure data, I estimate that this will happen 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 moment of maximum effect of fund usage, and the market is forward-looking. Given that this data is public, and we know that when the Treasury cannot increase the total US debt and the account is close to being exhausted, the market will look for new sources to obtain US dollar liquidity. At 76% utilization, March seems to be the moment when the market will ask "when is next?"
If we add the total dollar liquidity held by the Federal Reserve and the Treasury through the end of the first quarter, the total is $612 billion.
What happens next?
Once default and shutdown are imminent, a last-minute deal will be reached and the debt ceiling will be raised. At that point, the Treasury will be able to borrow again on a net basis and will have to refill the TGA. This will have a negative impact on USD liquidity.
Another important date in the second quarter is April 15, when tax payments are due. As can be seen in the table above, government finances improved substantially in April, which was negative for USD liquidity.
If the factors affecting TGA balances were the only ones determining cryptocurrency prices, I would expect a local market top to occur at the end of Q1. In 2024, Bitcoin reached a local high of around $73,000 in mid-March before entering a sideways trend and beginning a several-month decline on April 11, just before the tax payment was due.
Trading strategies
The problem with this analysis is that it assumes that USD liquidity is the most critical marginal driver of total global fiat liquidity. Here are some other considerations:
- Will China speed up or slow down the creation of RMB credit?
- Will the Bank of Japan start raising interest rates, which would strengthen the dollar-yen pair and unwind leveraged carry trades?
- Will Trump and Bessant initiate a massive overnight devaluation of the dollar relative to gold or other major fiat currencies?
- How effective has the Trump team been in reducing government spending and passing bills quickly?
These major macroeconomic issues cannot be determined in advance, but I have confidence in the mathematical model of how RRP and TGA balances will change over time. My confidence is further validated by the performance of the market from September 2022 to now: the increase in USD liquidity due to the decline in RRP balances directly led to the rise of cryptocurrencies and stocks, even though the Federal Reserve and other central banks have been raising interest rates at the fastest rate since the 1980s.
FFR cap (right, green) vs. Bitcoin (right, magenta) vs. S&P 500 (right, yellow) vs. RRP (left, white, inverted). Bitcoin and stocks bottomed in September 2022 and rebounded on the back of falling RRP, which injected more than $2 trillion of USD liquidity into global markets. This was a deliberate policy choice by "bad girl" Yellen to drain RRP by issuing more Treasury bonds. Powell and his financial tightening actions to combat inflation have completely failed.
Despite all the caveats, I think I have answered the question I originally asked. That is, the disappointment of the Trump team in not delivering on its proposed legislation in support of cryptocurrencies and commerce can be offset by the extremely positive USD liquidity environment, with an increase of up to $612 billion in the first quarter.
As is the case almost every year, the end of the first quarter was planned to be a time to sell, take a break, go to the beach, a nightclub, or a ski resort in the southern hemisphere, and wait for US dollar liquidity conditions to improve again in the third quarter.
As CIO of Maelstrom, I will encourage risk takers in the fund to adjust risk 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 shitcoins and bought BIO, VITA, ATH, GROW, PSY, CRYO, NEURON.
For a deeper dive into why Maelstrom thinks the DeSci narrative has the potential to be repriced higher, read Degen DeSci. If things go as I describe, I will rebase in March and jump into the "909 Open High Hat" phase. Of course, anything can happen, but I am bullish overall.
Maybe the Trump market sell-off happens in mid-December 2023 to late 2024 instead of mid-January 2025. Does that mean I'm a terrible predictor sometimes? Yes, but at least I can absorb new information and opinions and adjust before they lead to big losses or missed opportunities.
This is what makes the investing game intellectually engaging. Imagine how boring life would be if you could hit a hole-in-one every time you shot a golf ball, make every three-pointer in basketball, and make every shot in pool.
