How Dollar Liquidity Affects Crypto Assets Market Trends

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, becoming a key factor influencing the market.

Bitcoin bottomed out in the third quarter of 2022, when the Federal Reserve's reverse repurchase tool (RRP) peaked. Subsequently, the U.S. Treasury reduced long-term bond issuance and increased short-term zero-coupon bond issuance, withdrawing over $2 trillion from the RRP and injecting liquidity into the global financial markets. This drove a significant rise in Crypto Assets and the stock market, especially in large U.S. tech stocks.

In the first quarter of 2025, whether the positive stimulus of US dollar liquidity can offset the potential disappointment in the speed and effectiveness of certain policy implementations is a matter worth paying attention to. If so, market risks will be relatively controllable, and investors should also increase their risk exposure.

On the Federal Reserve side, the quantitative tightening ( QT ) policy is advancing at a pace of 60 billion USD per month, which means its balance sheet is shrinking. It is expected that by mid to late March, 180 billion USD of liquidity will be withdrawn.

The reverse repurchase tool ( RRP ) is nearing exhaustion. The Federal Reserve lowered the RRP rate by 0.30% at the December 2024 meeting, tying it to the lower bound of the federal funds rate to reduce the attractiveness of funds deposited in the RRP. 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 TGA is depleted and replenished after the debt ceiling is raised, the Federal Reserve will exhaust emergency measures and will not be able to stop yields from rising further. This has little impact on dollar Liquidity in the first quarter, but may affect the policy direction for the whole year.

RRP is expected to approach zero at some point in the first quarter as money market funds withdraw funds to purchase higher-yielding treasury bills. This means that $237 billion in liquidity will be injected.

Overall, the Federal Reserve's QT will reduce Liquidity by 180 billion USD, and the decrease in RRP balance will inject 237 billion USD, resulting in a net injection of 57 billion USD.

From the Ministry of Finance, due to the debt ceiling restrictions, funds can only be disbursed from the TGA. The current TGA balance is $722 billion. Political factors may delay the increase of the debt ceiling, and it is expected that the TGA balance will be exhausted between May and June. By the end of the first quarter, the Treasury will release approximately $555 billion in Liquidity.

Combining the Federal Reserve and the Treasury, the total increase in dollar liquidity in the first quarter is approximately 612 billion USD.

Based on this analysis, a local market peak may occur at the end of the first quarter. In 2024, Bitcoin consolidated after reaching a high of around $73,000 in mid-March, and began to decline before the tax deadline on April 11.

It is important to note that this analysis assumes that the liquidity of the US dollar is the key marginal driver of global fiat liquidity. Other factors such as China's credit policy, the Bank of Japan's policy, and the US dollar exchange rate also need to be considered.

Overall, the positive dollar liquidity environment in the first quarter may offset some of the market disappointment. As usual, the end of the first quarter will be a time for profit-taking, waiting for liquidity conditions to improve in the third quarter.

From an investment perspective, it may be worth considering increasing risk exposure, such as positioning in the emerging decentralized science ( DeSci ) field. Overall bullish, but it is essential to closely monitor market changes and adjust strategies promptly.