How Will Dollar Liquidity Affect the Crypto Assets Market Trends?

Recently, Crypto Assets investors have shifted their focus from ski resorts to market trends, particularly paying attention to whether the "Trump market" can be sustained. Although the market's high expectations for Trump's camp policies may bring short-term volatility, the stimulating effect of dollar Liquidity cannot be overlooked.

Currently, the trend of Bitcoin is closely related to the liquidity of the US dollar. The Federal Reserve and the US Treasury control the supply of US dollars in the global financial market, which is a key factor affecting the market. When Bitcoin bottomed out in the third quarter of 2022, it coincided with the peak of the Federal Reserve's reverse repurchase tool (RRP). Subsequently, the US Treasury reduced long-term bond issuance and increased short-term zero-coupon bond issuance, extracting over $2 trillion from the RRP, injecting liquidity into the global financial market, and driving up crypto assets and stock markets.

In the first quarter of 2025, the key issue is whether the positive stimulus of dollar Liquidity can offset the market's disappointment regarding the implementation speed and effectiveness 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, and it is expected to withdraw about 180 billion dollars in liquidity from the market by mid to late March. At the same time, the RRP balance is nearing exhaustion, and it is expected to release about 237 billion dollars in liquidity in the first quarter.

On the part of the Treasury, due to the debt ceiling issue, it is expected to spend funds from its general account at the Federal Reserve (TGA). The current balance of the TGA is $722 billion, and it is expected to be fully depleted between May and June. This means that approximately $555 billion in Liquidity may be released in the first quarter.

In summary, the net increase in U.S. dollar liquidity in the first quarter of 2025 is expected to be around $612 billion. This may be sufficient to offset potential disappointment in the market regarding Trump's policies and create positive momentum for the Crypto Assets market.

However, once the debt ceiling issue approaches default and government shutdown, it is likely that an agreement will be reached at the last moment to raise the debt ceiling. At that time, the Treasury will need to refill the TGA, which will have a negative impact on dollar Liquidity. In addition, the tax deadline on April 15 will also lead to an improvement in the government's financial situation, which is unfavorable for dollar Liquidity.

Based on the above analysis, a local market top may appear by the end of the first quarter. Investors may consider appropriately adjusting their positions by the end of March, waiting for the liquidity conditions in US dollars to improve again in the third quarter.

It is worth noting that, in addition to the liquidity of the US dollar, factors such as China's credit creation, Japan's monetary policy, and the depreciation of the US dollar may also affect market trends. Investors need to closely monitor various factors and flexibly adjust their strategies.

Overall, despite the uncertainties, the market outlook for the first quarter of 2025 remains optimistic. Emerging fields such as decentralized science (DeSci) may present investment opportunities. However, investors should also remain cautious, staying alert to new information and adjusting their strategies in a timely manner.