Crypto markets are gearing up for a downturn as liquidity tightening resumes after the U.S. debt ceiling is lifted, according to observers.
The replenishment of the US Treasury Department’s General Account and the shrinking of the Federal Reserve’s (Fed) balance sheet will drain hundreds of billions of dollars from the financial system, weighing on cryptocurrency prices in the coming months.
The easing liquidity situation earlier this year has boosted the prices of risky assets such as stocks and digital assets. A market-wide crypto rally pushes Bitcoin (BTC), the largest cryptocurrency by market cap, to $31,000, followed by a memecoin speculative frenzy reminiscent of a sugar rush near the bull market peak. changed to
But that trend is likely to change after lawmakers approve a boost to the government’s capacity to issue new bonds and put pressure on riskier investments.
First, the U.S. Treasury will need to replenish the nearly completely depleted Treasury General Account (TGA), which means replenishing about $500 billion in cash from the financial system.
“Risk assets can be especially hard hit because they tend to be more sensitive to liquidity conditions than safer assets such as bonds and many equity groups,” said macro analyst Noel Acheson. is high,” he said.
“The Treasury Department’s withdrawal from the Fed’s accounts was one of the tailwinds for the market earlier this year as money that would normally just be there was pumped into the economy in the form of government spending,” Acheson said. explained.
“The opposite is likely to happen now. Governments will need to issue government bonds to replenish their account balances, so that liquidity will be withdrawn from the market and put back into Treasury accounts. .”
The general account replenishment will come at the same time as the Fed continues its quantitative tightening campaign, temporarily suspended It was set up in March following the regional bank crisis to trim bloated balance sheets to prop up the economy during the pandemic.
Macro analyst Lynn Alden called it a “negative double whammy for liquidity.” market report.
“Unless or until the futures liquidity situation becomes clearer, the attractiveness of many liquidity-driven large caps will be lackluster in the coming months,” Alden said. . “This is an environment where investors need to understand what they own, prepare for volatility and avoid excessive leverage.”
According to Tom Dunleavy, founder of Dunleavy Investment Research, the debt ceiling resolution bill, if passed in its current form, would also contribute to the adverse effects on liquidity.
He explained that key points in the deal, such as cutting non-defense funding, recovering unused pandemic relief funds and resuming student loan payments, will limit the remaining funds that consumers can invest. Tweet. “The net liquidity is going to be very negative,” Dunleavy added.
The US House of Representatives ready to vote Regarding the debt ceiling hike on Wednesday evening.
Tighter liquidity conditions, reduced chances of Fed rate cut this year and current trading environment with low volatility and low volume make crypto markets ripe for shock, says institutional trading platform Falcon X said in a newsletter.
“This macro scenario[…]leads me to believe that we may be in the moment of calm before the storm for cryptocurrencies,” said David Rowant, head of research at FalconX.
