Dollar Liquidity Drives Crypto Market: A Bull Run May Arrive in Q1 2025

In the remote areas of the ski resort in Hokkaido, ample snowfall covered the dangerous "sasa" plants, creating excellent skiing conditions for enthusiasts. As we approach 2025, investors' attention has shifted from skiing to the crypto market, with particular focus on whether the "Trump market" can be sustained.

The price movement of Bitcoin is closely related to the Liquidity of the US dollar. The Federal Reserve and the US Treasury determine the amount of US dollars supplied to the global financial markets, which is a key factor affecting the market. In the third quarter of 2022, Bitcoin hit its lowest point when the Federal Reserve's reverse repurchase agreement (RRP) peaked. Subsequently, the US Treasury reduced the issuance of long-term bonds and increased the issuance of short-term zero-coupon bonds, withdrawing over $2 trillion from the RRP, injecting Liquidity into the global financial markets, and driving the crypto market and stock market up.

In the first quarter of 2025, will the positive stimulus from US dollar liquidity offset the disappointment that may arise from the implementation of Trump's policies? If so, market risks will be relatively manageable.

On the Federal Reserve side, the quantitative tightening (QT) policy is progressing at a rate 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 adjustment of the RRP rate has led to a decrease in its balance, which is expected to inject $237 billion in liquidity. In total, the Federal Reserve will net inject $57 billion in liquidity.

The Treasury, due to debt ceiling constraints, can only spend funds from its checking account (TGA). It is expected that politicians will not reach an agreement to raise the debt ceiling until May or June. Before that, the Treasury will continue to deplete the TGA balance, potentially using about $555 billion by the end of March.

Considering the combined influence of the Federal Reserve and the Treasury, a total of $612 billion in liquidity may be injected into the market in the first quarter of 2025. This could offset the disappointment caused by the slow implementation of Trump's policies and strengthen the crypto market.

However, once the debt ceiling is raised, the Treasury will replenish the TGA through net borrowing, which will negatively impact dollar Liquidity. Coupled with the tax season in mid-April, a phase market peak is expected at the end of the first quarter.

In addition to US dollar Liquidity, factors such as China's credit policy, the Bank of Japan's policy, and US dollar exchange rate policy will also affect the market. Overall, the market outlook for the first quarter is bullish, but the end of March may be a good time to take profits.