How Will US Dollar Liquidity Affect the Crypto Assets Market?

As 2025 approaches, investors are shifting their focus from skiing to the crypto market, particularly concerned about whether the "Trump market" can continue. The high expectations for policy actions from the Trump camp may lead to disappointment, negatively impacting the short-term market. However, it is also necessary to weigh the stimulating effect of US dollar liquidity.

Currently, the price movement of Bitcoin fluctuates with the rhythm of the dollar's release. The Federal Reserve and the U.S. Treasury hold the power to decide the amount of dollars supplied to the global financial market, which is an important factor affecting the market.

Bitcoin bottomed out in the third quarter of 2022, when the Federal Reserve's reverse repurchase tool (RRP) peaked. Under the urging of U.S. Treasury Secretary 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 over $2 trillion from the RRP. This effectively injected liquidity into the global financial markets. As a result, the Crypto Assets and stock markets, especially the large tech stocks listed in the U.S., surged significantly.

In the first quarter of 2025, will the positive stimulus of US dollar Liquidity be able to overshadow the potential disappointment regarding the speed and effectiveness of Trump's so-called "pro-Crypto Assets" and "pro-business" policies? If so, then market risks will become relatively manageable, and investors should increase their risk exposure.

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 The market is expected to peak in mid to late March, thus $180 billion of Liquidity is being withdrawn.

The reverse repurchase tool ( RRP ) has almost fallen to zero. To completely exhaust the funds of this tool, the Federal Reserve lowered the RRP rate by 0.30% at the meeting on December 18, 2024, which is 0.05% more than the decline in the policy rate. This move aims to link the RRP rate to the lower limit of the federal funds rate ( FFR ).

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

The Federal Reserve will reduce Liquidity by $180 billion due to quantitative tightening, while an additional $237 billion in Liquidity injection will be driven by the decrease in RRP balances. This means a net Liquidity injection of $57 billion in total.

On the part of the Treasury, since the total debt cannot increase before the U.S. Congress raises the debt ceiling, the Treasury can only spend funds from its checking account TGA. Currently, the balance of TGA is $722 billion. This situation is expected to occur between May and June of this year, at which point the TGA balance will be completely exhausted.

If we add the total amount of dollar Liquidity from the Federal Reserve and the Treasury by the end of the first quarter, it amounts to 612 billion dollars.

Once the default and shutdown are imminent, a last-minute agreement will be reached, and the debt ceiling will be raised. By then, the Treasury will be able to borrow again in net borrowing mode and must refill the TGA. This will have a negative impact on USD Liquidity.

April 15th tax payment deadline is also an important date. Data shows that government finances improved significantly in April, which is negative for USD liquidity.

If the factors affecting the TGA balance are the only determinants of crypto assets prices, a local market top is expected to occur at the end of the first quarter. In 2024, Bitcoin reached a local high of about $73,000 in mid-March, then entered a sideways consolidation and began a few months of decline before the tax due date on April 11.

Overall, the disappointment of the Trump team in fulfilling its proposed legislation supporting Crypto Assets and business can be compensated by the extremely positive dollar Liquidity environment, with the increase in dollar Liquidity in the first quarter reaching as high as $612 billion.

According to the plan, the end of the first quarter will be the time to sell, take a break, and wait for the Liquidity conditions of the US dollar to improve in the third quarter.

Investors may consider adjusting the risk to a higher mode. The emerging decentralized science ( DeSci ) field may be a direction worth paying attention to.

Overall, the market outlook is bullish. However, anything can happen, and investors need to continuously absorb new information and opinions, making adjustments before they lead to significant losses or missed opportunities. This is what makes the investment game intriguing.