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

As the ski season approaches, investors' attention has turned to the Crypto Assets market, particularly whether the so-called "Trump rally" can continue. Although the market's high expectations for Trump's camp policies may lead to short-term disappointment, the stimulating effect of dollar Liquidity cannot be ignored.

Currently, the trend of Bitcoin is closely related to the release pace of the US dollar. The Federal Reserve and the US Treasury control the dollar supply in the global financial markets, which is a key factor affecting 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 the issuance of long-term bonds and increased the issuance of short-term zero-coupon bonds, withdrawing over $2 trillion from the RRP and injecting liquidity into the global market. As a result, Crypto Assets and stock markets surged significantly.

In the first quarter of 2025, the key question is whether the positive stimulus of US dollar Liquidity can offset the potential disappointment caused by the slow implementation of Trump's policies. If so, market risks will be relatively manageable.

On the Federal Reserve side, the quantitative tightening ( QT ) policy is advancing at a pace of 60 billion dollars per month. It is expected that by mid to late March, when the market peaks, 180 billion dollars of liquidity will be withdrawn.

The reverse repurchase tool ( RRP ) is nearing exhaustion. The Federal Reserve lowered the RRP rate by 0.30% in December 2024 to reduce the attractiveness of depositing funds into the RRP. This indicates that the Federal Reserve is working hard to enhance demand for U.S. Treasury issuance, avoiding a stop to QT or a restart of quantitative easing.

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. However, once these funds are depleted, the Federal Reserve will find it difficult to prevent yields from rising further.

The RRP is expected to approach zero at some point in the first quarter, which means that $237 billion of Liquidity will be injected. Considering the $180 billion withdrawn through QT, the net injection of Liquidity is $57 billion.

On the part of the Treasury, due to the debt ceiling restrictions, expenditures can only be made from the TGA. Currently, the TGA balance is $722 billion. The key lies in when politicians agree to raise the debt ceiling.

Trump may not include it in the agenda until the debt ceiling issue becomes urgent. According to estimates, the TGA balance will be exhausted between May and June, at which point the debt ceiling will have to be raised.

Combining the Federal Reserve and the Treasury, it is expected that a total of 612 billion dollars in dollar Liquidity will be injected by the end of the first quarter.

This could drive a local market peak by the end of the first quarter. After Bitcoin reached a peak of around $73,000 in mid-March 2024, it consolidated before starting to decline ahead of the April tax deadline.

In addition to USD liquidity, other macro factors such as China's credit, Japan's monetary policy, and the depreciation of the dollar must also be considered. However, based on market performance since September 2022, the increase in USD liquidity resulting from the decline in RRP balances has directly driven the rise of Crypto Assets and stocks.

Overall, the positive dollar Liquidity environment in the first quarter is expected to offset the disappointment caused by the slow implementation of Trump's policies. As planned, the end of the first quarter will be a good time to realize profits.

As the Chief Investment Officer of a fund, I encourage adjusting the risk to "extreme risk" mode. We have ventured into the decentralized science (DeSci) field and purchased some undervalued coins. If things go well, we will further increase our risk tolerance in March.

Although anything can happen, I am generally optimistic about the market. Even if predictions sometimes miss the mark, it is important to adjust strategies in a timely manner based on new information. This is what makes the investment game so fascinating.