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

Ski enthusiasts are concerned every year about whether the snow cover is adequate for the ski trails. For investors, at the beginning of 2025, their focal point is whether the crypto market can maintain its upward momentum. This article will analyze how US dollar Liquidity affects the Crypto Assets market, particularly the trend of Bitcoin.

Currently, the trend of Bitcoin is closely related to the pace of the dollar released. The Federal Reserve and the U.S. Treasury control the dollar supply in the global financial market, 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 long-term bond issuance and increased short-term bond issuance, withdrawing over $2 trillion from the RRP to inject liquidity into the global financial market. This drove significant rises in crypto assets and the stock market, especially in large U.S. tech stocks.

In the first quarter of 2025, the key issue is whether the positive stimulus of US dollar Liquidity can offset the potential disappointment in the market regarding the speed and effectiveness of policy implementation. First, the Federal Reserve's quantitative tightening (QT) policy is advancing at a rate of 60 billion dollars per month, meaning that its balance sheet is being reduced. It is expected that by mid to late March, 180 billion dollars of Liquidity will be withdrawn.

At the same time, the reverse repurchase tool (RRP) is nearing exhaustion. The Federal Reserve adjusted the RRP rate in December 2024 to reduce the attractiveness of depositing funds into the RRP. It is expected that the RRP will approach zero at some point in the first quarter, which means that $237 billion in dollar liquidity will be injected.

On the Treasury's side, due to the debt ceiling issue, the Treasury will draw on its general account (TGA) funds at the Federal Reserve. The current TGA balance is $722 billion. This situation is expected to last until May or June, at which point the TGA balance may be completely exhausted.

Considering factors from the Federal Reserve and the Treasury Department, it is expected that approximately $612 billion in dollar liquidity will be injected into the market in the first quarter of 2025. This may have a positive impact on the Crypto Assets market.

However, once the debt ceiling is raised, the Treasury will need to refill the TGA, which will negatively impact dollar liquidity. Additionally, the tax due date on April 15 will also put pressure on liquidity.

Based on these factors, a local market top is expected to appear by the end of the first quarter. Investors may consider taking profits at the end of March, waiting for liquidity conditions in the dollar to improve in the third quarter.

In addition to the liquidity of the US dollar, other macroeconomic factors need to be considered, such as China's monetary policy, the Bank of Japan's interest rate decisions, and the potential devaluation of the US dollar. These factors can all have a significant impact on the market.

Overall, despite various uncertainties, the positive dollar liquidity environment in the first quarter may support market trends. Investors can take on moderate risk, but should also remain vigilant and adjust strategies based on new information.