Original title: Sasa

Author: Arthur Hayes, founder of BitMEX; Compiler: Deng Tong, Golden Finance

The remote areas of Hokkaido ski resorts have superior terrain, and most of them are accessible Reached via cable car. At the beginning of the ski season, the biggest concern is when there will be enough snow for ski resorts to open. The problem for skiers is that bamboo forests are full of bamboo. Bamboo has thin stems that resemble a reed, but has sharp green leaves that can cut your skin if you're not careful. Trying to ski in a bamboo forest is dangerous because your blade can slip off, leaving you in what I call a game of "man versus tree." Therefore, if there is not enough snow to cover the bamboo forest, remote areas can be extremely dangerous.

The amount of snowfall in Hokkaido has not been seen in the past seventy years. The snow is very thick. Therefore, backcountry gates open in late December rather than the first or second week of January. As 2025 approaches, the question on cryptocurrency investors’ minds is whether what Trump wants to push can be sustained. In my latest article, "Arthur Hayes: How Trump's New Deal and Countries' Responses Will Impact Cryptocurrency," I argued that high expectations for the Trump camp's actions have disappointed the market. I still see this as a potential negative that could weigh on the market in the short term, but against that I have to balance the dollar's liquidity impulse. For now, Bitcoin will wobble as the pace of dollar issuance changes. Monetary officials with power at the U.S. Federal Reserve (Fed) and the U.S. Treasury Department determine the amount of U.S. dollars supplied to world financial markets.

Bitcoin bottomed in the third quarter of 2022, when the Federal Reserve’s reverse repurchase facility (RRP) peaked. At Treasury Secretary Bad Gurl Yellen's request, her department issued fewer long-term coupon bonds and more short-term zero-coupon notes, which siphoned more than $2 trillion from the RRP. This is an injection of liquidity into global financial markets. Cryptocurrencies, especially large U.S.-listed technology stocks, fell sharply as a result. The chart above shows Bitcoin (LHS, yellow) versus RRP (RHS, white, inverted); as you can see, as RRP falls, Bitcoin rises.

The question I intend to answer is whether, at least in the first quarter of 2025, the positive USD liquidity impulse will be able to dampen the speed of implementation of Trump's so-called pro-cryptocurrency and pro-business and the impact was disappointing. If so, then it's safe to shred it and Maelstrom should increase the risk on its books.

First, I will discuss the Federal Reserve, which is a minor consideration in my analysis. Then, I'll discuss how the U.S. Treasury will respond to the debt ceiling. If politicians hesitate to raise the debt ceiling, the Treasury Department will cut back on its role at the FedGeneral Account (TGA), injecting liquidity into the system and creating positive momentum for cryptocurrencies.

For the sake of brevity, I will not explain why the debits and credits to RRP and TGA are negative and positive, respectively, to dollar liquidity.

The pace of quantitative tightening (QT) by the Federal Reserve continues at a pace of $60 billion per month, which means that the size of its balance sheet has shrunk. There was no change to the Fed's forward guidance on the pace of quantitative tightening. I'll explain why later in the article, but my prediction is that the market will peak in mid-to-late March, so that equates to $180 billion worth of liquidity being lost from January to March due to quantitative tightening.

RRP has dropped to almost zero. In an effort to completely exhaust the facility, the Fed belatedly changed the RRP rate. At the December 18, 2024 meeting, the Fed lowered the RRP rate by 0.30%, which was 0.05% above the rate cut. This is to tie the RRP rate to the federal funds rate (FFR) floor.

If you are wondering why the Fed waited until the RRP was almost exhausted before realigning the floor of interest rates to the FFR and making it less attractive to deposit money into the facility, I implore you to read Zoltan Pozar's article "Cheat Cinderella". My conclusion from his article is that the Fed is doing everything it can to stimulate demand for US Treasury issuance before resorting to halting QT, once again providing supplemental leverage ratio exemptions to US commercial bank branches, and possibly reinstating Quantitative Easing (QE), aka “the money printing presses start rolling”.

Currently, there are two pools of money that will help control bond yields. For the Fed, the 10-year Treasury yield cannot exceed 5% because that is the level at which bond market volatility explodes (MOVE Index). As long as liquidity exists in the RRP and TGA, the Fed does not have to significantly change its currency and acknowledge fiscal dominance.

Once the TGA is exhausted (positive dollar liquidity) and subsequently replenished (negative dollar liquidity) as the debt ceiling is hit and subsequently raised, the Fed will no longer resort to stopgap measures to stem yields The unstoppable upward trend follows the decision to start an easing cycle last September. This is not material to dollar liquidity conditions in the first quarter, but it is only relevant to the possibility that the Fed may change later in the year if yields continue to rise.

A comparison of the FFR ceiling (RHS, white, inverted) versus the US 10-year yield (LHS, yellow) clearly shows that as the Fed moves above With interest rates lowered amid its 2% inflation target, bond yields have risen.

The real question is how quickly RRP fell from about $237 billion to zero. I expect it willIt reached near zero levels at some point in the first quarter as money market funds (MMFs) maximized their returns by withdrawing funds and buying high-yielding Treasury bills (T-bills). To be very clear, this represents an injection of $237 billion in U.S. dollar liquidity in the first quarter.

Treasury bills with maturities less than 12 months yielded above 4.25% (white) after the December 18 RRP rate adjustment, which is the FFR floor.

The Fed will withdraw $180 billion in liquidity due to quantitative tightening and encourage an additional $237 billion in liquidity due to reductions in RRP balances due to the Fed's adjustment of the incentive rate. This totals a net liquidity injection of $57 billion.

Yellen told the market that she expects the Treasury Department to begin taking "special measures" to provide funds for the United States between January 14 and 23. The Treasury Department has two options on how to pay the bill. They can issue debt (negative dollar liquidity) or spend funds from their checking account at the Fed (positive dollar liquidity). Because the total debt cannot increase until the U.S. Congress raises the debt ceiling, the Treasury Department can only spend funds from its checking account, the TGA. Currently, the TGA balance is $722 billion.

The first big assumption is when politicians will agree to raise the debt ceiling. It will be the first test of Trump's support among Republican lawmakers. Keep in mind that his governing margins — Republican majorities over Democrats in both the House and Senate — are razor-thin. There is a wing of the Republican Party that likes to walk around with its chest puffed out and claiming that they care about shrinking the bloat, every time the debt ceiling is discussed. They will persist in voting for a debt limit increase until they deliver big returns for their districts. Trump has been unable to persuade them to veto a spending bill in late 2024 unless he raises the debt ceiling. Democrats, after getting slapped in a gender-neutral bathroom during the last election, will no longer be willing to help Trump free up funds to pursue his goals. Harris 2028, anyone? In fact, the Democratic presidential nominee will be the silver fox Gavin Newsom. So, to get the job done, Trump would be wise to keep the debt ceiling issue out of any proposed legislation unless absolutely necessary.

When failure to raise the debt ceiling will lead to a technical default on maturing government bonds or a complete shutdown, raising the debt ceiling becomes necessary. Using the 2024 revenue and expenditure data released by the Treasury as a reference, I estimate that this will happen between May and June this year, when the TGA balance will be completely depleted.

It is helpful to visualize the rate and intensity with which TGAs are used to fund funding and predict when withdrawals will have the greatest impact. The market is forward-lookingsexual. Given that these are public data and we know how the Treasury operates when the Treasury is unable to add to total U.S. debt when accounts are close to being depleted, markets will be looking for new sources of dollar liquidity. At 76% burn, March appears to be a time when the market will ask "What's next?"

If we add up the amount of dollar liquidity the Fed and Treasury had as of the end of the first quarter, the total is $612 billion.

What happens next?

Once defaults and shutdowns loomed, last-minute deals were struck and the debt ceiling raised. At that point, the Treasury will again be free to borrow on a net basis and the TGA will have to be refilled. This would be negative dollar liquidity.

Another important date in the second quarter is April 15, when taxes are due. As can be seen from the table above, the fiscal position of , which improved significantly in April, was negative for USD liquidity.

If factors affecting TGA balances were the only factors determining cryptocurrency prices, then I would expect a market top to occur at the end of Q1. In 2024, Bitcoin hit a local high around $73,000 in mid-March before trading sideways and beginning a multi-month decline on April 11, the 15th tax deadline.

The problem with this analysis is that it assumes that USD liquidity is the most important marginal driver of global fiat liquidity. Here are some other considerations:

- Will it speed up or slow down the creation of RMB credit?

- Will the Bank of Japan start raising interest rates, allowing the dollar to appreciate against the yen and unwinding the leveraged carry trade?

- Will Trump and Bessent depreciate the dollar significantly against gold or other major fiat currencies overnight?

- How effective will the Trump team be in rapidly cutting spending and passing legislation?

None of these major macroeconomic issues can be known in advance, but I am confident in the math behind changes in RRP and TGA balances over time. Market performance from September 2022 to the present further strengthens my confidence: despite the Fed and other central banks raising interest rates at the fastest pace since the 1980s, increased USD liquidity due to falling RRP balances directly led to cryptocurrency and stock prices rise.

FFR Cap (right, green) vs Bitcoin (right, magenta) vs S&P 500 (right, yellow) vs RRP (left side, white, inverted). Bitcoin and stocks bottomed in September 2022 and rallied as the fall in RRP injected over $2 trillion in liquidity into global markets. This was a deliberate choice by bad girl Yellen to issue more Treasury bills to deplete the RRP. Powell and his tighteningActions to improve the financial environment to fight inflation have completely failed.

With all these caveats in mind, I believe I have answered the question posed at the outset. That said, the Trump team’s disappointment with its proposed pro-crypto and pro-business legislation could be made up for by an extremely positive USD liquidity environment, with USD liquidity increasing by as much as $612 billion in the first quarter. As almost every year, late in the first quarter it is time to sell, relax on the beach, at the counter or at a ski resort in the Southern Hemisphere and wait for positive statutory liquidity conditions to re-emerge in the third quarter.

As Chief Investment Officer of Maelstrom, I will encourage risk takers in the fund to shift their risk to DEGEN (Degen is an abbreviation for Degenerate, usually used to refer to participating in high-risk speculative transactions or investments. Cryptocurrency people). The first step in this direction was our decision to enter the booming field of decentralized science tokens. We like undervalued coins and bought $BIO; $VITA; $ATH; $GROW; $PSY; $CRYO; $NEURON. For more insight into why Maelstrom thinks the DeSci narrative is ripe for re-rating, read "Degen DeSci." If things go as high as I've described, I'll be cutting back on the baseline and riding a 909 open hi-hat sometime in March. Of course, anything can happen, but overall, I'm optimistic. Have I changed my mind about my last post? Sort of. Maybe the Trump sell-off occurs from mid-December to late 2024 instead of mid-January 2025. Does this mean I am sometimes a poor predictor of the future? Yes, but at least I will absorb new information and perspectives and change them before they lead to significant losses or missed opportunities. That's why this investing game is intellectually appealing. Imagine being able to hit a hole-in-one every time you play golf, hit a three-point shot every time when playing basketball or taking a break, and hit the ball every time when playing pool. Life can get very boring. What the heck, let me fail and succeed and be happy. But hopefully there will be a little more success than failure.