Arthur Hayes' latest article: How will dollar liquidity fuel the new crypto market cycle in 2025?
TechFlow Selected TechFlow Selected
Arthur Hayes' latest article: How will dollar liquidity fuel the new crypto market cycle in 2025?
Anything could happen, but the overall trend is bullish.
Navigating Web3 tides with focused insightsAuthor: Arthur Hayes, Chief Investment Officer of Maelstrom Fund, Co-Founder and Former CEO of BitMEX
Translation: zhouzhou, BlockBeats
Editor's Note: In this article, Hayes analyzes how U.S. dollar liquidity affects the cryptocurrency market—particularly Bitcoin’s price movements—by explaining the Federal Reserve’s Reverse Repo (RRP) operations and fund flows in the U.S. Treasury General Account (TGA). He explores how increased dollar liquidity drives rallies in both crypto and stock markets. Approximately $612 billion in dollar liquidity is expected to be injected into the financial system during Q1 2025, potentially creating a positive market impact. Finally, the author mentions that Maelstrom Fund is investing in the DeSci sector and expresses bullish sentiment toward future markets.
Below is the original text (slightly edited for clarity):
The remote ski access areas of Hokkaido’s ski resorts offer excellent terrain, most of which can be easily reached via lifts. Every year early on, skiers’ biggest concern is whether there’s enough snow cover to safely open these zones. One major hazard for skiers is "Sasa"—a Japanese term referring to a type of bamboo plant.
This plant has reed-thin stems but leaves as sharp as knives, capable of cutting skin with just a slight brush. Skiing over Sasa is extremely dangerous because your ski edges may slip unexpectedly, leading to what I call a perilous game of “man versus tree.” Therefore, if snow depth isn’t sufficient to bury the Sasa, backcountry skiing becomes highly risky.
This year, Hokkaido experienced its highest snowfall in nearly 70 years, with astonishingly deep powder. As a result, the backcountry access gates opened by late December—typically they don’t open until the first or second week of January.
As we enter 2025, investors are shifting focus from skiing to the crypto markets, particularly wondering whether the so-called “Trump rally” will continue. In my latest piece, *Trump Truth*, I argued that overly optimistic expectations about policy actions from Trump’s camp could lead to disappointment, negatively impacting short-term market performance. At the same time, however, I must weigh in the stimulative effect of U.S. dollar liquidity.
Currently, Bitcoin’s price moves in rhythm with the release of U.S. dollars, controlled by financial elites at the Federal Reserve (Fed) and the U.S. Department of Treasury, who determine the volume of dollars supplied to global financial markets—an essential driver of market trends.
Bitcoin bottomed in Q3 2022, coinciding with the peak level of the Fed’s Reverse Repo (RRP) facility. Under pressure from Treasury Secretary Yellen (nicknamed “Bad Girl Yellen”), the U.S. Treasury reduced issuance of long-term coupon bonds while increasing short-term zero-coupon bond issuance, withdrawing over $2 trillion from the RRP.
This effectively injected massive liquidity into global financial markets. Cryptocurrencies and equities—especially large-cap U.S. tech stocks—surged as a result. The chart above illustrates the relationship between Bitcoin (left axis, yellow) and RRP (right axis, white, inverted): as RRP declined, Bitcoin prices rose.
In Q1 2025, the key question I’m trying to answer is whether the positive stimulus from dollar liquidity can offset potential investor disappointment over the pace and effectiveness of Trump’s so-called “pro-crypto” and “pro-business” policies. If yes, then market risks remain manageable, and Maelstrom Fund should increase risk exposure.
First, I’ll briefly discuss the Federal Reserve—a minor factor in my analysis. Then I’ll focus on how the U.S. Treasury will manage the debt ceiling. If politicians delay raising the debt ceiling, the Treasury will draw down funds from its account at the Fed (the TGA), injecting liquidity into markets and generating positive momentum for crypto assets.
For brevity, I won’t go into detail about how RRP and TGA operations negatively and positively affect dollar liquidity, respectively. Please refer to the article *Teach Me, Daddy* for an explanation of these mechanisms.
Federal Reserve
The Fed’s Quantitative Tightening (QT) program continues at a pace of $60 billion per month, shrinking its balance sheet. Currently, the Fed’s forward guidance on QT remains unchanged. My prediction is that markets will top out around mid-to-late March, meaning $180 billion in liquidity will be drained over the quarter.
The Reverse Repo (RRP) facility has nearly hit zero. To fully deplete it, the Fed delayed adjusting the RRP interest rate. At its meeting on December 18, 2024, the Fed cut the RRP rate by 0.30%, 0.05% more than the reduction in the main policy rate. This move aimed to tie the RRP rate to the lower bound of the Federal Funds Rate (FFR).
If you’re curious why the Fed waited until RRP was almost exhausted before aligning its rate with the FFR floor—to reduce incentives for parking money in RRP—I recommend reading Zoltan Pozar’s article *Cheating on Cinderella*. My takeaway is that the Fed is exhausting every tool to boost demand for U.S. Treasury issuance, avoiding having to halt QT, reinstate the supplementary leverage ratio exemption for U.S. bank branches, or restart Quantitative Easing (QE)—i.e., turn the printing presses back on.
Two liquidity pools currently help suppress bond yield increases. For the Fed, the 10-year U.S. Treasury yield must stay below 5%, as crossing this threshold would sharply increase bond market volatility (MOVE index). As long as liquidity remains in the RRP and the Treasury General Account (TGA), the Fed doesn’t need to make major monetary policy adjustments or admit that fiscal dominance is taking hold.
Fiscal dominance would place Powell in a subordinate position to “Bad Girl Yellen,” and after January 20, to Scott Bessent. As for Scott, I haven’t settled on a nickname yet. If his decisions make me swim in gold like a modern-day Scrooge McDuck due to dollar depreciation, I might give him a friendlier moniker.
Once the Treasury General Account (TGA) is depleted (positive for dollar liquidity), and later replenished after the debt ceiling is raised (negative for dollar liquidity), the Fed will have exhausted all emergency measures, unable to prevent yields from rising further following the easing cycle that began in September last year.
This has little impact on Q1 dollar liquidity conditions—it's merely a reflection on how Fed policy might evolve later in the year if yields keep climbing.
The upper bound of the Federal Funds Rate (FFR, right axis, white, inverted) versus the 10-year U.S. Treasury yield (left axis, yellow) clearly shows that even as the Fed cuts rates amid inflation above its 2% target, bond yields rise.
The real issue lies in how fast the Reverse Repo (RRP) facility drops from ~$237 billion to zero. I expect RRP to approach zero at some point in Q1, as money market funds (MMFs) withdraw cash to buy higher-yielding Treasury bills (T-bills) for maximum returns. Crucially, this means $237 billion in dollar liquidity will be injected during the quarter.
After the RRP rate change on December 18, yields on Treasury bills (T-bills) maturing within 12 months have exceeded 4.25% (white line), surpassing the lower bound of the Federal Funds Rate.
The Fed will drain $180 billion via QT, but the reduction in RRP balances due to adjusted interest incentives will inject an additional $237 billion in liquidity. This results in a net liquidity injection of $57 billion.
Treasury Department
“Bad Girl” Yellen informed markets she expects the Treasury to begin “extraordinary measures” between January 14 and 23 to fund the U.S. government. The Treasury has two options to pay bills: issue new debt (negative for dollar liquidity) or spend from its checking account at the Fed (positive for dollar liquidity).
Since total debt cannot increase until Congress raises the debt ceiling, the Treasury can only draw from its TGA account. Currently, TGA holds $722 billion. The first big assumption is when lawmakers will agree to raise the debt ceiling. This will be an early test of Trump’s support among Republican legislators—remember his narrow margins in both House and Senate.
Some Republicans love to puff their chests and strut proudly, claiming each time the debt ceiling comes up that they care deeply about reducing the bloated size of government. They delay voting to raise the ceiling until they secure generous benefits for their districts.
Trump already failed to convince them to veto the end-of-2024 spending bill unless the debt ceiling was raised. Democrats, having suffered a “gender-neutral bathroom” style defeat in the last election, are unlikely to help Trump unlock funding for his policy agenda.
Harris 2028, anyone? Actually, the Democratic presidential candidate will likely be silver-haired Gavin Newsom. Thus, to get things moving, it would be wise for Trump to avoid putting the debt ceiling on the agenda until absolutely necessary.
Raising the debt ceiling becomes critical when failure to do so risks technical default on maturing Treasuries or a full government shutdown. Based on Treasury’s 2024 revenue and expenditure data, I estimate this situation will arise between May and June this year, when the TGA balance will be fully depleted.
Visualizing the speed and intensity of TGA drawdown helps predict when its impact will peak—markets are forward-looking. Since this data is public, and we know the market will seek alternative sources of dollar liquidity once the Treasury hits the debt ceiling and the account nears empty, the moment when usage reaches 76%—around March—seems likely to prompt the question: “What next?”
If we sum up the total dollar liquidity injections from both the Fed and Treasury by the end of Q1, the figure reaches $612 billion.
What Happens Next?
Once default and shutdown loom, a last-minute deal will be struck to raise the debt ceiling. At that point, the Treasury can resume net borrowing and must refill the TGA—this will negatively impact dollar liquidity.
Another key date in Q2 is April 15—the tax deadline. As seen in the chart above, government finances improve significantly in April, which is negative for dollar liquidity.
If TGA dynamics were the sole determinant of crypto prices, I’d expect a local market top by the end of Q1. In 2024, Bitcoin hit a local high of ~$73,000 in mid-March, entered consolidation, and began a multi-month decline starting April 11—just before the tax deadline.
Trading Strategy
The problem with this analysis is that it assumes dollar liquidity is the most critical marginal driver of global fiat liquidity. Here are other factors to consider:
-
Will China accelerate or slow down RMB credit creation?
-
Will the Bank of Japan start hiking rates, driving USD/JPY higher and unwinding leveraged carry trades?
-
Will Trump and Bessent engineer a massive overnight devaluation of the dollar against gold or other major fiat currencies?
-
How efficient will the Trump team be in rapidly cutting government spending and passing legislation?
These major macroeconomic variables cannot be predicted with certainty. However, I am confident in my mathematical model of how RRP and TGA balances evolve over time. My confidence is further validated by market behavior since September 2022: declining RRP balances led to increased dollar liquidity, directly fueling gains in crypto and equities—even as the Fed and other central banks hiked rates at the fastest pace since the 1980s.
Upper bound of FFR (right, green), Bitcoin (right, magenta), S&P 500 (right, yellow), and RRP (left, white, inverted). Bitcoin and stocks bottomed in September 2022 and rebounded as RRP declined, injecting over $2 trillion in dollar liquidity into global markets. This was a deliberate policy choice by “Bad Girl” Yellen—issuing more Treasuries to drain RRP. Powell’s tightening efforts to combat inflation were rendered completely ineffective.
Despite various warnings, I believe I’ve answered my initial question: disappointment over the Trump team’s failure to deliver on promised pro-crypto and pro-business legislation can be offset by an extremely favorable dollar liquidity environment, with up to $612 billion in fresh liquidity entering in Q1.
As usual, Q1’s end is the time to sell, take a break, head to the beach, nightclubs, or ski resorts in the Southern Hemisphere, and wait for dollar liquidity conditions to improve again in Q3.
As CIO of Maelstrom, I will encourage risk-takers in the fund to shift into “DEGEN” (extreme risk) mode. Our first step in this direction is our decision to enter the emerging decentralized science (DeSci) space. We love undervalued meme coins and have bought BIO, VITA, ATH, GROW, PSY, CRYO, NEURON.
To understand why Maelstrom believes the DeSci narrative could be repriced higher, read *Degen DeSci*. If things unfold as I anticipate, I’ll adjust benchmarks in March and jump into the “909 Open High Hat” phase. Of course, anything can happen—but overall, I’m bullish.
Maybe the Trump-driven market selloff occurred between mid-December 2023 and end-2024, not mid-January 2025. Does that mean I’m sometimes a poor forecaster? Yes. But at least I can absorb new information and adjust before major losses or missed opportunities occur.
That’s what makes the investment game intellectually engaging. Imagine how boring life would be if every golf swing was a hole-in-one, every three-pointer went in, every pool shot sank perfectly.
Join TechFlow official community to stay tuned
Telegram:https://t.me/TechFlowDaily
X (Twitter):https://x.com/TechFlowPost
X (Twitter) EN:https://x.com/BlockFlow_News
Arthur Hayes
