Analysis of the Impact of Dollar Liquidity on Crypto Assets Market

The remote ski areas of Hokkaido often deter skiers due to a type of bamboo plant called "sasa." This plant has thin stems and sharp leaves, and if the snow cover is not thick enough, it can easily cut the skin or cause the skis to lose control. This year, Hokkaido experienced the highest snowfall in 70 years, allowing these areas to open early.

As 2025 approaches, investors' attention has shifted from the snowfields to the crypto market, particularly focusing on whether the so-called "Trump market" can sustain itself. Although the market's high expectations for Trump’s policies may lead to short-term disappointment, the stimulating effect of US dollar liquidity cannot be overlooked.

Currently, the price trend of Bitcoin is closely related to the supply of US dollars. 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.

Bitcoin hit bottom 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, extracting over $2 trillion from the RRP to inject liquidity into the global financial markets. This drove a significant rise in Crypto Assets and the stock market, particularly among large U.S. tech stocks.

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

The Federal Reserve's quantitative tightening policy is advancing at a pace of $60 billion per month, and it is expected to withdraw $180 billion in Liquidity from the market by mid to late March. Meanwhile, the RRP is nearing exhaustion, and the Federal Reserve has adjusted the RRP rate to further reduce its attractiveness.

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 monetary policy. However, once these funds are depleted, the Federal Reserve may have to face a fiscal-dominated situation.

The RRP is expected to approach zero at some point in the first quarter, which means that $237 billion in Liquidity will be injected. Taking into account the impact of QT, the Federal Reserve is expected to net inject $57 billion in Liquidity in the first quarter.

The Treasury, due to debt ceiling restrictions, can only spend from the TGA. Currently, the TGA balance is $722 billion. It is expected that the political deadlock will last until May-June, by which time the TGA may be depleted. Before that, the Treasury will continue to spend from the TGA, which will have a positive impact on market liquidity.

Considering the combined effects of the Federal Reserve and the Treasury, it is expected that a total of $612 billion in liquidity will be injected in the first quarter of 2025. This may be enough to offset potential disappointment in the market regarding Trump’s policies, driving the Crypto Assets market to continue rising.

Based on this analysis, I expect the market may reach a temporary peak by the end of March. After that, with the debt ceiling issue resolved and the tax season approaching, the liquidity environment may turn negative.

As an investor, I will maintain a high risk appetite in the first quarter, including positioning in emerging fields such as decentralized science ( DeSci ). However, I plan to moderately reduce my risk exposure by the end of March, awaiting the next round of liquidity improvement.

Overall, I remain optimistic about the market in the short term, but I will closely monitor changes in various macro factors and adjust my strategy in a timely manner. Investment is always full of uncertainty, and that is precisely what makes it appealing.