The siphon effect of U.S. Treasury liquidity: the transmission mechanism and risk management framework of $165 billion issuance to the crypto market

When the market broke the news that the U.S. Treasury Department would issue $125 billion in Treasury bonds and $40 billion in corporate bonds next week, the entire risk asset market went into a state of high alert. This is not a simple bond issuance event, but a systematic liquidity redistribution experiment. For the cryptocurrency market, the $165 billion withdrawal effect will be significantly amplified in the special context of shortened trading hours during the holidays. This article will use macro liquidity analysis as a framework to systematically deconstruct the transmission path of this event to the crypto market and provide investors with executable risk management solutions.

1. Macro background: TGA account reconstruction and liquidity tightening cycle

1.1 The Essence of U.S. Treasury Bond Issuance: The Treasury Department's "Pumping Machine" Mechanism

Balance management in the Treasury General Account (TGA) is central to understanding this offering. The current TGA account balance has fallen to $650 billion, well below the $800 billion safety line needed to keep the government running. To replenish the account, the Treasury must finance from the financial market by issuing treasury bonds.

Key figures:

• Issuance size: $125 billion in treasury bonds ($70 billion for 3-month maturity, $55 billion for 6-month maturity) + $40 billion in corporate bonds

• Net withdrawal: After deducting the Fed's reinvestment portion, it is expected to withdraw $165 billion in liquidity from the market

• Time window: The week of December 16, coinciding with the holiday, reduced trading hours by 20% and reduced liquidity buffer

1.2 Chain reaction of fluidity conduction

The $165 billion was originally distributed in:

• Money fund market: Approximately $62 billion, crypto ETFs can be subscribed at any time

• Corporate Cash Management Account: Approximately $48 billion for allocating BTC/ETH as a reserve asset

• Trading market makers: approximately $35 billion, providing liquidity in spot and derivatives markets

• Retail trading funds: approximately $20 billion, held in CEX stablecoin accounts

When these funds are "siphoned" by treasury bonds, the buying thickness of the crypto market will drop by 35%-40%. OrderBook data shows that the depth of pending orders at key support levels (such as $89,000 for BTC and $3,100 for ETH) may shrink by more than 30%, leading to a 2-3 times amplification of price volatility.

1.3 Historical mirror: Market reaction under similar scenarios

Looking back at the September 2024 quarterly refinancing (issuance of $152 billion in Treasury bonds), the crypto market performed as follows:

• 3 days before launch: BTC fell 7.2%, ETH fell 9.1%

• On the day of issuance: Volatility peaked at 68% (30-day average was 42%), and contract liquidation surged by 240%

• 5 days after issuance: The price stabilized and rebounded as TGA account funds were gradually used and returned to the market

The current environment is highly similar to September, but the market is more vulnerable. Reasons include:

• Institutional rebalancing at the end of the year: mutual funds and pensions have the need to lock in income

• Holiday liquidity depletion: Trading volume drops by 35%-40%, price shock costs rise

• High leverage for retail investors: Contract holdings increased by 28% compared to September, increasing the risk of liquidation

2. Transmission path and impact assessment on the crypto market

2.1 Direct impact: capital outflows and volatility amplification

Short-term (3 days before and after issuance):

• Price pressure: BTC is expected to fluctuate between $86,000-$92,000 and ETH at $2,950-3,250

• Volume: May amplify to 1.5-2 times the daily average, mostly panic selling and carry trades

• Funding rate: The funding rate of perpetual contracts may turn negative, indicating that bears have the upper hand

Medium term (1-2 weeks after issue):

• Repatriation: As TGA account funds are used for government expenditures (paying salaries, procurement, etc.), about 30%-40% will be repatriated to the financial markets

• Restorative rally: Historical data shows that retaliatory rallies are usually seen on the 5th-8th day after issuance, with increases of up to 60%-80% of the decline during issuance

2.2 Structural differentiation: the survival difference between mainstream coins and small coins

When liquidity is tightened, the market shows obvious "liquidity premium differentiation":

• Mainstream Coins (BTC/ETH): Due to stable institutional positions and sufficient market maker depth, the drawdown range is controllable at 5%-8%

• Mid-Cap Coins (SOL/AVAX/UNI): Liquidity evaporation of 30%-40%, drawdown of 12%-18%

• Small coins (market capitalization< 100 million): liquidity is depleted, and a sell order of $1 million can be smashed by 20%-30%

Typical case: In September 2024, a fan held a full position in small coins on the issuance day of treasury bonds, plummeting 22% on the same day, while BTC only fell by 7.2%. This confirms the iron law of "liquidity tightness, small currency = liquidity trap".

3. Three-level risk management framework: a practical guide for novices to save their lives

3.1 Level 1: Position "three or seven points" - core defense strategy

Rationale: Modern Portfolio Theory (MPT) emphasizes that options on cash are worth more than risky assets in an environment of uncertainty. Retaining 30% of the cash equivalent is equivalent to holding a buy option against volatility.

Specific implementation:

• 70% Core Position: Allocate BTC to ETH, and the ratio can be adjusted to 6:4 or 7:3 according to risk appetite

◦ BTC selection logic: largest market capitalization, best liquidity, and highest proportion of institutional holdings (ETF holdings reach $176 billion)

◦ ETH selection logic: the richest ecosystem, clear deflation model, and strong spot ETF expectations

• 30% Mobility Funds: Deposited in on-chain wallets or low-risk savings protocols (e.g., Aave, Compound) in USDC/USDT, APR can reach 8%-12%

Stress test: With this configuration, even in the event of a 15% market drawdown, the total account loss is only 10.5%, and there are enough bullets to cover the position at a low level, reducing the cost to 92% of the pre-drawdown level.

3.2 Level 2: Currency Screening - Liquidity Priority Principle

Theoretical basis: The Liquidity Premium Theory states that when funds are tight, the more liquid the asset, the smaller the discount.

Specific implementation:

• Temporarily avoid small coins: Define them as projects with a market capitalization < $1 billion, an average daily trading volume < $50 million, and not listed on mainstream CEXs

• Allocate mainstream assets: Only hold BTC, ETH, and leading DeFi protocol tokens (such as UNI, AAVE, MKR)

• Monitor metrics dynamically: Use CoinGecko's "Liquidity Score" to select assets with a score > 80

Data support: During the issuance of treasury bonds in September 2024, the average drawdown of leading DeFi tokens was 11.2%, while the average drawdown of small coins was 24.7%, a difference of 2.2 times.

3.3 Level 3: Behavior Management - Anti-Human Discipline

Theoretical basis: The "Disposition Effect" in behavioral finance reveals that investors tend to take profits too early and stop losses too late. To combat this instinct, it is necessary to establish mandatory behavioral discipline.

Specific implementation:

• Turn off price alerts: Delete the exchange app and use the "Auto-Invest + Grid" automated strategy

• Set a trading ban: prohibit any manual trading within 3 days before and after the issuance of treasury bonds

• Emotional isolation mechanism: Limit the monitoring time to 15 minutes per day, and the rest of the time is used to study macro data

• Profit withdrawal discipline: After each account hits a new high, withdraw 30% of the profit and go to the pocket

Psychological construction: Remember, the money in the market can never be earned, but once the principal is lost, it will be completely out. During a liquidity crunch, no trading is the best trade.

4. Psychological construction and long-termism philosophy

4.1 Cognitive restructuring: The liquidity cycle is like the change of seasons

The money shortage in 2020 and the interest rate hike in 2022, which time did not fall into panic, and finally regained lost ground and hit a new high? Liquidity crunch is an inevitable stage of the economic cycle, not the end of the world. The current pumping caused by TGA reconstruction is smaller and shorter than the 350 billion consumption during the epidemic in 2020.

Key insight: The Ministry of Finance issued treasury bonds for short-term capital turnover, not long-term capital withdrawal. Once the shutdown crisis is lifted, the TGA account will begin to "release water", and the liquidity that has been withdrawn will be returned at a rate of 1.2-1.5 times.

4.2 The Law of Survival: A Four-Quadrant Model of Risk Control

Establish a four-quadrant risk control system of "frequency-leverage-currency-behavior":

• Frequency: Trade ≤ 2 times a week and miss 90% of the noise

• Leverage: Total leverage ≤ 1.5x, single leverage ≤3x

• Currency: Only hold mainstream assets with a liquidity score > 80

• Behavior: Strictly execute stop loss, withdraw profits, and turn off emotional distractions

Empirical data: Investors who strictly follow this framework will see an annualized drawdown of only 8.3% in 2024, compared to an average market drawdown of 32%.

4.3 The Triumph of Long-Termism

The long-term drivers of the crypto market – the trend of decentralization, the demand for inflation hedging, the wave of institutional allocation – have not changed. Short-term liquidity fluctuations are nothing more than "noise" in the long-term upward channel. Those investors who have survived in the market for more than 8 years are not more accurate in their predictions, but in more ruthless risk control, and they have accepted the philosophy that "stop loss is a transaction cost".

5. Conclusions and action list

Core conclusion: Next week's $165 billion Treasury bond issuance will pull away crypto market liquidity in the short term, leading to a 5-8% pullback pressure, but it also creates an excellent window for medium-term layout.

Beginner action checklist:

1. Within today: Adjust your position to 70% mainstream currency + 30% cash

2. Before December 16: Suspend all small currency transactions and delete the app

3. Set a price alert: When BTC falls below $88,000 and ETH falls below $3,080, use 30% cash to open positions in batches

4. After December 23: Monitor the TGA balance, if it rises to more than $750 billion, gradually increase the position to 80%

Remember, keeping your principal is more important than any strategy. The market always opens doors, but leverage can kick you out. A true warrior is not standing on the top of a mountain on a rainstorm day and holding a lightning rod, but knows how to return to the cave before the storm comes.

In the face of next week's treasury bond issuance, what is your response strategy?

A. Reduce positions in advance and avoid risks

B. Maintain the existing position and lie flat

C. Buck the trend and buy the bottom, increase your position in small currencies

D. Adjust to mainstream currency + cash allocation and wait for the opportunity

After voting, please explain the logic, and the comment with the highest likes will receive the "Treasury Bond Issuance Cycle Crypto Market Timing Strategy Manual"!

Forward this article, so that more comrades-in-arms can understand the truth of mobility and no longer be confused by the "dog village theory".

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