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

Recently, investors' focus has shifted from skiing to the Crypto Assets market, particularly whether the so-called "Trump rally" can continue. While the market's high expectations for certain policy actions may lead to disappointment, it is also necessary to weigh the stimulating effect of dollar Liquidity.

Currently, the price movement of Bitcoin is closely related to the pace of dollar release. The Federal Reserve and the U.S. Treasury control the supply of dollars in the global financial market, which is a key factor influencing the market. When Bitcoin bottomed out in the third quarter of 2022, 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 the RRP and injecting liquidity into the global financial market. This boosted the Crypto Assets and stock markets, particularly the significant rise in large U.S. tech stocks.

In the first quarter of 2025, the key issue is whether the positive stimulus of USD Liquidity can offset potential policy disappointment sentiment. If so, market risks will be relatively controllable. The following will analyze the policy trends of the Federal Reserve and the U.S. Treasury and their impact on Liquidity.

The Federal Reserve is currently advancing its quantitative tightening policy at a pace of $60 billion per month (QT). It is expected that by mid to late March, when the market peaks, approximately $180 billion in Liquidity will be withdrawn. At the same time, the RRP is nearing exhaustion, and the Federal Reserve is adjusting interest rates to reduce its attractiveness. This means that approximately $237 billion in dollar Liquidity will be injected in the first quarter.

The U.S. Treasury, due to the debt ceiling issue, is expected to draw funds from its general account (TGA). The current TGA balance is $722 billion. Political factors may delay the process of raising the debt ceiling until May-June. Before that, the Treasury will continue to draw from the TGA, which will inject Liquidity into the market.

Considering the combined influence of the Federal Reserve and the Treasury, it is expected that approximately $612 billion in dollar liquidity will be injected into the market in the first quarter of 2025. This may be enough to offset potential policy disappointment and drive the Crypto Assets market upward.

However, once a debt default or government shutdown approaches, a last-minute agreement may be reached to raise the debt ceiling. At that time, the Treasury will need to refill the TGA, which will negatively impact dollar liquidity. Furthermore, the tax deadline on April 15 will also have a negative effect on liquidity.

Based on these factors, a local market peak is expected to occur by the end of the first quarter. Investors may consider appropriately reducing their holdings by the end of March and re-entering when Liquidity conditions improve again in the third quarter.

In addition to the liquidity of the US dollar, attention should also be paid to changes in China's credit policy, the Bank of Japan's policy, the US dollar exchange rate policy, and other macroeconomic factors. Overall, the current market environment is leaning towards optimism, but investors still need to remain vigilant and closely monitor changes in various indicators.