The Impact of Dollar Liquidity on the Crypto Assets Market and the Outlook for the First Quarter of 2025

The remote ski entry points at the Hokkaido ski resorts offer excellent terrain, most of which can be easily accessed by gondola. At the beginning of each year, the most concerning question for skiing enthusiasts is whether the snow accumulation is sufficient to cover and whether these entry points will be opened. A major problem for skiers is "sasa," which is the Japanese term for a type of bamboo plant.

The stem of this plant is as thin as a reed, but the leaves are sharp like a knife, and if you're not careful, they can cut your skin. Skiing on "sasa" is very dangerous because your ski edges may slip, leading to a perilous "man versus tree" game. Therefore, if there is not enough snow to cover the "sasa", skiing in remote areas becomes highly risky.

This year, the snowfall in Hokkaido has reached a record high in nearly 70 years, with an astonishing depth of powder snow. As a result, the ski entrance to the back mountains opened at the end of December, whereas in previous years it usually opened in the first or second week of January.

As 2025 approaches, investors' focus has shifted from skiing to the crypto market, particularly whether the "Trump market" can continue. In the latest analysis, some believe that the high expectations for the Trump camp's policy actions may lead to disappointment, negatively impacting the short-term market. However, at the same time, we must also weigh the stimulating effect of dollar liquidity.

Currently, the trend of Bitcoin fluctuates with the pace of the dollar's release, as the financial elite of 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 a crucial factor influencing the market.

Bitcoin bottomed out in the third quarter of 2022, when the Federal Reserve's reverse repurchase agreements (RRP) peaked. At the urging of the U.S. Secretary of the Treasury, the U.S. Treasury reduced the issuance of long-term coupon bonds while increasing the issuance of short-term zero-coupon bonds, thus drawing over $2 trillion from the RRP.

This has actually injected Liquidity into the global financial market. Crypto Assets and the stock market, especially large technology stocks listed in the United States, have significantly risen as a result. Data shows a clear relationship between Bitcoin and RRP: as RRP decreases, Bitcoin prices rise.

In the first quarter of 2025, the key issue is whether the positive stimulus of US dollar Liquidity can overshadow the potential disappointment regarding the implementation speed and effectiveness of Trump's so-called "pro-Crypto Assets" and "pro-business" policies. If so, then market risks will become relatively controllable, and investors should consider increasing their risk exposure.

First, we need to pay attention to the Federal Reserve's movements. Then, we will focus on analyzing how the U.S. Treasury responds to the debt ceiling issue. 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.

Federal Reserve Policy Analysis

The Federal Reserve's Quantitative Tightening (QT) policy is advancing at a speed of $60 billion per month, which means its balance sheet is shrinking. Currently, there has been no change in the Federal Reserve's forward guidance on the pace of QT, and the market is expected to peak in mid to late March, thus drawing $180 billion of liquidity out.

The reverse repurchase agreement tool (RRP) has almost dropped to zero. In order 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 decrease in the policy rate. This move aims to tie the RRP rate to the lower limit of the federal funds rate (FFR).

The Federal Reserve is exhausting all tools to enhance demand for U.S. Treasury issuance, aiming to avoid halting QT, providing supplemental leverage ratio exemptions to U.S. commercial bank branches, or restarting quantitative easing (QE) as much as possible.

Currently, there are two funding pools that will help suppress the rise in bond yields. For the Federal Reserve, the 10-year U.S. Treasury yield cannot exceed 5%, as this level would trigger a significant increase in bond market volatility. 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 its monetary policy.

Once the Treasury General Account (TGA) is depleted and subsequently replenished due to an increase after the debt ceiling is reached, the Federal Reserve will exhaust its emergency measures, unable to prevent the inevitable further rise in yields following the easing cycle that began last September.

The upper limit of the federal funds rate (FFR) and the yield on the 10-year U.S. Treasury clearly show that when the Federal Reserve lowers interest rates in the face of an inflation rate above its 2% target, bond yields rise.

The real issue is the speed at which reverse repurchase agreements (RRP) have fallen from about $237 billion to zero. It is expected that RRP will approach zero at some point in the first quarter as money market funds (MMF) withdraw funds and buy higher-yielding Treasury bills (T-bill) to maximize returns. This means that $237 billion of dollar liquidity will be injected in the first quarter.

After the RRP rate change on December 18, the yield on Treasury bills (T-bills) maturing within 12 months has exceeded 4.25%, which is the lower bound of the federal funds rate.

The Federal Reserve will reduce liquidity by $180 billion due to Quantitative Tightening (QT), while an additional $237 billion liquidity injection will be driven by a decrease in RRP balances caused by adjustments in the reward rate. This totals a net liquidity injection of $57 billion.

Department of Finance Strategy Analysis

The Treasury Secretary is expected to begin taking "extraordinary measures" to fund the U.S. government between January 14 and 23. The Treasury has two options to pay government bills: either issue debt or draw funds from its checking account at the Federal Reserve.

Due to the total debt not being able to increase before the debt ceiling is raised by the U.S. Congress, the Treasury can only spend funds from its checking account TGA. Currently, the balance of TGA is $722 billion. The first major assumption is when politicians will agree to raise the debt ceiling. This will be the first test of Trump's support among Republican lawmakers.

Some Republicans may delay voting to support an increase in the debt ceiling until they secure some generous returns for their districts. Trump has failed to persuade them that if the debt ceiling is not raised, he will veto the spending bill for the end of 2024. After suffering a crushing defeat in the last election, Democrats are unlikely to help Trump unlock government funds to achieve his policy goals.

When not raising the debt ceiling could lead to a technical default on maturing Treasury bonds or a complete government shutdown, raising the debt ceiling becomes crucial. According to the Treasury's published 2024 revenue and expenditure data, this situation is expected to occur between May and June of this year, when the TGA balance will be completely exhausted.

The visualization of TGA (Treasury General Account) usage speed and intensity helps predict the maximum effect moment of fund utilization, as the market is forward-looking. Given that this data is all public, and we know that when the Treasury cannot increase the total US debt and the account is nearing depletion, the market will look for new sources to obtain dollar liquidity. When the usage rate reaches 76%, March seems to be the moment when the market will ask, "What's next?"

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

Future Market Trend Prediction

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 on a net basis and must refill the TGA. This will have a negative impact on dollar Liquidity.

Another important date in the second quarter is April 15, when taxes are due. Data shows that government finances improved significantly in April, which is a negative for dollar Liquidity.

If the factors affecting the TGA balance are the only determinants of Crypto Assets prices, a local market top is expected at the end of the first quarter. In 2024, Bitcoin reached a local high of around $73,000 in mid-March, then entered a consolidation phase and began a several-month decline before the tax payment deadline on April 11.

trading strategy

This analysis assumes that US dollar Liquidity is the most critical marginal driver of global total legal Liquidity. Here are some other considerations:

• Will China accelerate or slow down the creation of RMB credit?
• Will the Bank of Japan start raising interest rates, which would lead to the appreciation of the USD-JPY and unravel leveraged arbitrage trades?
• Will Trump and his team carry out a massive overnight devaluation of the US dollar against gold or other major fiat currencies?
• How efficient is the Trump team in rapidly reducing government spending and passing legislation?

These major macroeconomic issues cannot be predetermined, but there is a certain confidence in the mathematical models of how RRP and TGA balances change over time. This confidence is further validated, especially by the market performance from September 2022 to now: the decrease in RRP balances has directly led to an increase in dollar liquidity, resulting in the rise of Crypto Assets and stocks, despite the Federal Reserve and other central banks raising interest rates at the fastest pace since the 1980s.

Despite various warnings, the disappointment of the Trump team in failing to deliver on its proposed legislation supporting Crypto Assets and business can be offset by an extremely positive dollar liquidity environment, with an increase in dollar liquidity in the first quarter reaching as high as $612 billion.

As almost every year, as planned, the end of the first quarter will be the time to sell, take a break, go to the beach, nightclubs, or ski resorts in the Southern Hemisphere, and wait for the dollar liquidity conditions to improve again in the third quarter.

Some investors are adjusting their risk to "DEGEN" (extreme risk) mode. The first step in this direction is to decide to venture into the emerging decentralized science (DeSci) field. Some investors are optimistic about undervalued related tokens such as BIO, VITA, ATH, GROW, PSY, CRYO, NEURON, etc.

Overall, the market outlook is bullish. However, anything can happen, and investors need to stay alert to new information and perspectives, making adjustments before they lead to significant losses or missed opportunities. This is what makes the investment game so engaging.