US Dollar Liquidity and the Crypto Assets Market: Q1 2025 Outlook

At the beginning of 2025, investors shifted their focus from ski resorts to the crypto market, paying particular attention to whether the "trend of a certain political figure" can be sustained. Although the market's high expectations for certain policy actions may lead to short-term disappointment, the stimulating effect of USD liquidity remains an important factor that cannot be ignored.

The trend of Bitcoin is closely related to the rhythm of the dollar's release. The supply of dollars in the global financial market is dominated by the decisions of the Federal Reserve and the U.S. Treasury, which is a key factor affecting the market.

Bitcoin hit bottom in the third quarter of 2022, while the Federal Reserve's reverse repurchase agreements (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, extracting 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, particularly in large U.S. tech stocks.

The key issue for the first quarter of 2025 is whether the positive stimulus of US dollar Liquidity can offset the disappointment that may arise from certain policy implementations falling short of expectations. If so, market risks will be relatively manageable, and investors should correspondingly increase their risk exposure.

First, the Federal Reserve's Quantitative Tightening (QT) policy is proceeding at a pace of $60 billion per month, meaning its balance sheet is shrinking. It is expected that by mid to late March, approximately $180 billion in Liquidity will be withdrawn.

The reverse repurchase agreement tool (RRP) is nearing exhaustion. To completely deplete the funds in this tool, the Federal Reserve adjusted the RRP policy rate in December 2024, linking it to the lower bound of the federal funds rate (FFR). This move aims to reduce the attractiveness of depositing funds into the RRP.

Currently, the liquidity in the RRP and the Treasury General Account (TGA) helps to suppress the rise in bond yields. As long as these two pools of funds are not depleted, the Federal Reserve does not need to make significant adjustments to monetary policy or acknowledge a fiscally dominant situation.

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

Considering that the Federal Reserve's QT reduces liquidity by 180 billion, while the decrease in the RRP balance brings a liquidity injection of 237 billion, the net liquidity injection is approximately 57 billion.

From the Ministry of Finance, due to the debt ceiling restrictions, funds can only be spent from the TGA. The current TGA balance is $722 billion. It is expected that politicians will reach an agreement to raise the debt ceiling between May and June of this year, at which point the TGA balance will be completely depleted.

According to estimates, by the end of the first quarter, the Federal Reserve and the Treasury will have injected approximately $612 billion in dollar liquidity.

Based on these factors, a local market top is expected to appear by the end of the first quarter. In 2024, Bitcoin entered a period of consolidation after reaching a local high of around $73,000 in mid-March, and began several months of decline before the tax deadline on April 11.

However, other factors need to be considered, such as the speed of credit creation in China, the Bank of Japan's policies, and the potential depreciation of the dollar. Nevertheless, the market performance from September 2022 to now has validated the impact of changes in RRP and TGA balances on the market.

Overall, the positive dollar liquidity environment in the first quarter is expected to offset some of the disappointment that certain policies may bring. As is customary, the end of the first quarter will be a good time to reduce positions and wait for improvements in dollar liquidity conditions in the third quarter before re-entering.

In terms of investment strategy, we have decided to enter the emerging field of decentralized science (DeSci) and have purchased some relevant coins. Overall, I am optimistic about the market, but I am also ready to adjust my strategy based on new information.

The charm of investing lies in this: it requires constant absorption of new information and perspectives, making timely adjustments before significant losses occur or opportunities are missed. This uncertainty and challenge is precisely what makes the investment game captivating.