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

In the remote areas of Hokkaido ski resorts, the amount of snowfall is the biggest concern for skiers. This year, Hokkaido has seen its highest snowfall in nearly 70 years, allowing the backcountry ski entrances to open earlier than in previous years. As 2025 approaches, investors are shifting their focus from skiing to the Crypto Assets market, particularly whether the market trend can be sustained.

The trend of Bitcoin is closely related to the pace of dollar release. The Federal Reserve and the U.S. Treasury control the supply of dollars 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 zero-coupon bond issuance, withdrawing over $2 trillion from the RRP and injecting liquidity into the global financial market. This drove significant increases in Crypto Assets and the stock market, especially in U.S. large tech stocks.

In the first quarter of 2025, the key issue is whether the positive stimulus of US dollar Liquidity can offset potential disappointment in policy. If so, market risks will be relatively manageable. The Fed's quantitative tightening policy continues to advance 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 reduction in RRP balances will inject approximately $237 billion in Liquidity into the market.

The U.S. Treasury is facing a debt ceiling issue and may need to draw funds from its general account (TGA). The current TGA balance is $722 billion, which is expected to be completely exhausted between May and June. Before that, the Treasury's use of funds will inject a large amount of Liquidity into the market. Considering the combined impact of the Federal Reserve and the Treasury, a total of $612 billion in Liquidity is expected to be injected into the market by the end of the first quarter.

This positive environment of dollar liquidity may offset the market's disappointment with the implementation of policies. As is customary, the end of the first quarter may be a temporary market peak. After that, investors may choose to take profits and wait for the dollar liquidity conditions to improve again in the third quarter.

In addition to the liquidity of the US dollar, other influencing factors include China's credit policy, the potential interest rate hikes by the Bank of Japan, and the US dollar depreciation policy, among others. These macroeconomic issues are difficult to predict, but the models for changes in RRP and TGA balances are relatively reliable.

Overall, despite various uncertainties, the positive dollar liquidity environment in the first quarter may drive the market upward. Investors should closely monitor the progress of the debt ceiling negotiations and changes in the TGA balance, and consider adjusting their investment strategies before the end of March.