For now, Bitcoin will fluctuate with changes in the pace of USD issuance. The monetary officials at the Federal Reserve (Fed) and the US Treasury Department determine the amount of USD supplied to global financial markets.

Bitcoin's Bottom and the Fed's Reverse Repo Mechanism

Bitcoin bottomed out in the third quarter of 2022, when the Fed's Reverse Repo Facility (RRP) reached its peak. At the request of US Treasury Secretary Yellen (Bad Gurl Yellen), her department issued fewer long-term coupon bonds and more short-term zero-coupon bills, which drained over USD 2 trillion from the RRP. This was a liquidity injection into global financial markets. Cryptocurrencies, especially large US-listed tech stocks, thus fell sharply. The chart above shows Bitcoin (LHS, yellow) vs. RRP (RHS, white, inverted); as you can see, Bitcoin rose as the RRP fell.

Will Disappointment in Trump's Policies Be Offset by Positive USD Liquidity?

The question I intend to answer is whether, at least in the first quarter of 2025, positive USD liquidity impulses can抑制the disappointment over the pace and impact of Trump's alleged pro-cryptocurrency and pro-business policies. If so, it's safe to tear it up, and Maelstrom should increase its risk on the books.

First, I'll discuss the Fed, a secondary consideration in my analysis. Then, I'll address how the US Treasury will handle the debt ceiling.

If politicians hesitate to raise the debt ceiling, the Treasury will draw down its General Account (TGA) at the Fed, injecting liquidity into the system and creating positive momentum for cryptocurrencies.

For brevity, I won't explain why borrowers and lenders in the RRP and TGA are negative and positive for USD liquidity, respectively.

The Federal Reserve

The Fed's Quantitative Tightening (QT) policy continues at a pace of USD 60 billion per month, meaning its balance sheet is shrinking. The Fed's forward guidance on the pace of QT remains unchanged. I'll explain why later, but my prediction is that the market will peak in mid-to-late March, equivalent to a USD 180 billion liquidity reduction due to QT from January to March.

The RRP has fallen to nearly zero. To fully exhaust this tool, the Fed belatedly changed the policy rate for the RRP. At its meeting on December 18, 2024, the Fed lowered the RRP rate by 0.30%, 0.05% more than the cut in the policy rate. This hooks the RRP rate to the lower bound of the Federal Funds Rate (FFR).

If you wonder why the Fed waited until the RRP was nearly depleted to realign the rate with the FFR's lower bound and reduce the attractiveness of depositing money in the facility, I urge you to read Zoltan Pozar's article "Tricking Cinderella." My conclusion from his article is that the Fed is exhausting all means to stimulate demand for US Treasury bond issuance before resorting to stopping QT, reintroducing the supplementary leverage ratio exemption for US commercial bank branches, and possibly resuming Quantitative Easing (QE), aka "turning on the printing press."

Currently, two pools of money will help control bond yields. For the Fed, the 10-year US Treasury yield cannot exceed 5%, as this is the level at which bond market volatility erupts (MOVE index). As long as liquidity exists in the RRP and TGA, the Fed doesn't have to drastically change its monetary policy and acknowledge fiscal dominance.

Once the TGA is depleted (positive USD liquidity) and subsequently replenished due to the debt ceiling being hit and then raised (negative USD liquidity), the Fed will no longer resort to expedient measures to halt the unstoppable upward trend in yields that began after the decision to ease the monetary cycle in September last year. This is not critical for USD liquidity conditions in the first quarter, but it's just a preview of how Fed policy might change later this year if yields continue to rise.

The comparison of the FFR ceiling (RHS, white, inverted) vs. the US 10-year yield (LHS, yellow) clearly shows that bond yields have risen as the Fed has lowered rates despite inflation above its 2% target.

The real issue is the speed at which the RRP has fallen from around USD 237 billion to zero. I expect it to reach near-zero levels sometime in the first quarter as Money Market Funds (MMFs) maximize their returns by withdrawing funds and purchasing high-yield Treasury bills (T-bills). It's clear that this represents a USD 237 billion injection of USD liquidity in the first quarter.

After the RRP rate adjustment on December 18, T-bills with maturities of less than 12 months yielded more than 4.25% (white), which is the lower bound of the FFR.

The Fed will withdraw USD 180 billion in liquidity due to QT and encourage an additional USD 237 billion in liquidity due to the decline in RRP balances resulting from the Fed's adjustment of incentive rates. This totals a net injection of USD 57 billion in liquidity.

The Treasury Department

Yellen has told the market that she expects the Treasury to begin using "extraordinary measures" to fund the US government between January 14 and 23. The Treasury has two options for paying the government's bills. They can issue debt (negative USD liquidity) or spend from their checking account at the Fed (positive USD liquidity). Since the total debt cannot increase until Congress raises the debt ceiling, the Treasury can only spend from its TGA. Currently, the TGA balance is USD 722 billion.

The first big assumption is when politicians will agree to raise the debt ceiling. This will be the first test of Trump's popularity among Republican legislators. Remember, his governing majority—Republicans over Democrats in both the House and Senate—is very slim. There's a faction within the Republican Party that loves to chest-thump and swagger around claiming they care about shrinking the bloated size of government, as they do every time the debt ceiling is discussed. They'll insist on voting to raise the debt ceiling until they get juicy returns for their districts. Trump has already failed to convince them to veto spending bills at the end of 2024 without raising the debt ceiling. Democrats, having been clobbered in the last election over gender-neutral bathrooms, won't be eager to help Trump free up government funds to achieve his policy goals. Harris in 2028, anyone? In reality, the Democratic presidential nominee will be Silver Fox Gavin Newsom. So, to get things done, Trump would be wise to exclude the debt ceiling from any proposed legislation unless absolutely necessary.

Raising the debt ceiling becomes necessary when not raising it would lead to a technical default on maturing Treasuries or a complete government shutdown. Using the Treasury's published revenue and expenditure data for 2024 as a reference, I estimate this will happen between May and June this year, when the TGA balance will be completely depleted.

It's helpful to visualize the speed and intensity at which the TGA is used to fund the government and predict when withdrawals will have the greatest impact. The market is forward-looking. Given that these are public data and we know how the Treasury operates when it cannot increase the total US debt as the account approaches depletion, the market will seek new sources of USD liquidity. At 76% depletion, March seems like the time when the market will ask, "What's next?"

If we add up the USD liquidity amounts from the Fed and Treasury until the end of the first quarter, the total is USD 612 billion.

What Happens Next?

Once default and shutdown are imminent, a last-minute agreement will be reached, and the debt ceiling will be raised. At that point, the Treasury will again be free to borrow net and must refill the TGA. This will be a negative for USD liquidity.

Another important date in the second quarter is April 15, when tax payments are due. As can be seen from the table above, the government's fiscal position improves significantly in April, which is a negative for USD liquidity.

If the factors affecting the TGA balance were the only ones determining cryptocurrency prices, I would expect the market top at the end of the first quarter. In 2024, Bitcoin hit a local high of around USD 73,000 in mid-March, then consolidated and began a months-long decline before the 15th tax deadline on April 11.

Trading Strategies

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

• Will China accelerate or decelerate the creation of yuan credit?

• Will the Bank of Japan start raising policy rates, thereby strengthening the USD against the yen and unwinding leveraged carry trades?

• Will Trump and Besent sharply devalue the USD against gold or other major fiat currencies overnight?

• How effective will the Trump team be in swiftly cutting government spending and passing legislation?

None of these major macroeconomic questions can be known in advance, but I am confident in the mathematical principles

For now, Bitcoin will fluctuate with changes in the pace of USD issuance. The monetary officials at the Federal Reserve (Fed) and the US Treasury Department determine the amount of USD supplied to global financial markets.

Bitcoin's Bottom and the Fed's Reverse Repo Mechanism

Bitcoin bottomed out in the third quarter of 2022, when the Fed's Reverse Repo Facility (RRP) reached its peak. At the request of US Treasury Secretary Yellen (Bad Gurl Yellen), her department issued fewer long-term coupon bonds and more short-term zero-coupon bills, which drained over USD 2 trillion from the RRP. This was a liquidity injection into global financial markets. Cryptocurrencies, especially large US-listed tech stocks, thus fell sharply. The chart above shows Bitcoin (LHS, yellow) vs. RRP (RHS, white, inverted); as you can see, Bitcoin rose as the RRP fell.

Will Disappointment in Trump's Policies Be Offset by Positive USD Liquidity?

The question I intend to answer is whether, at least in the first quarter of 2025, positive USD liquidity impulses can抑制the disappointment over the pace and impact of Trump's alleged pro-cryptocurrency and pro-business policies. If so, it's safe to tear it up, and Maelstrom should increase its risk on the books.

First, I'll discuss the Fed, a secondary consideration in my analysis. Then, I'll address how the US Treasury will handle the debt ceiling.

If politicians hesitate to raise the debt ceiling, the Treasury will draw down its General Account (TGA) at the Fed, injecting liquidity into the system and creating positive momentum for cryptocurrencies.

For brevity, I won't explain why borrowers and lenders in the RRP and TGA are negative and positive for USD liquidity, respectively.

The Federal Reserve

The Fed's Quantitative Tightening (QT) policy continues at a pace of USD 60 billion per month, meaning its balance sheet is shrinking. The Fed's forward guidance on the pace of QT remains unchanged. I'll explain why later, but my prediction is that the market will peak in mid-to-late March, equivalent to a USD 180 billion liquidity reduction due to QT from January to March.

The RRP has fallen to nearly zero. To fully exhaust this tool, the Fed belatedly changed the policy rate for the RRP. At its meeting on December 18, 2024, the Fed lowered the RRP rate by 0.30%, 0.05% more than the cut in the policy rate. This hooks the RRP rate to the lower bound of the Federal Funds Rate (FFR).

If you wonder why the Fed waited until the RRP was nearly depleted to realign the rate with the FFR's lower bound and reduce the attractiveness of depositing money in the facility, I urge you to read Zoltan Pozar's article "Tricking Cinderella." My conclusion from his article is that the Fed is exhausting all means to stimulate demand for US Treasury bond issuance before resorting to stopping QT, reintroducing the supplementary leverage ratio exemption for US commercial bank branches, and possibly resuming Quantitative Easing (QE), aka "turning on the printing press."

Currently, two pools of money will help control bond yields. For the Fed, the 10-year US Treasury yield cannot exceed 5%, as this is the level at which bond market volatility erupts (MOVE index). As long as liquidity exists in the RRP and TGA, the Fed doesn't have to drastically change its monetary policy and acknowledge fiscal dominance.

Once the TGA is depleted (positive USD liquidity) and subsequently replenished due to the debt ceiling being hit and then raised (negative USD liquidity), the Fed will no longer resort to expedient measures to halt the unstoppable upward trend in yields that began after the decision to ease the monetary cycle in September last year. This is not critical for USD liquidity conditions in the first quarter, but it's just a preview of how Fed policy might change later this year if yields continue to rise.

The comparison of the FFR ceiling (RHS, white, inverted) vs. the US 10-year yield (LHS, yellow) clearly shows that bond yields have risen as the Fed has lowered rates despite inflation above its 2% target.

The real issue is the speed at which the RRP has fallen from around USD 237 billion to zero. I expect it to reach near-zero levels sometime in the first quarter as Money Market Funds (MMFs) maximize their returns by withdrawing funds and purchasing high-yield Treasury bills (T-bills). It's clear that this represents a USD 237 billion injection of USD liquidity in the first quarter.

After the RRP rate adjustment on December 18, T-bills with maturities of less than 12 months yielded more than 4.25% (white), which is the lower bound of the FFR.

The Fed will withdraw USD 180 billion in liquidity due to QT and encourage an additional USD 237 billion in liquidity due to the decline in RRP balances resulting from the Fed's adjustment of incentive rates. This totals a net injection of USD 57 billion in liquidity.

The Treasury Department

Yellen has told the market that she expects the Treasury to begin using "extraordinary measures" to fund the US government between January 14 and 23. The Treasury has two options for paying the government's bills. They can issue debt (negative USD liquidity) or spend from their checking account at the Fed (positive USD liquidity). Since the total debt cannot increase until Congress raises the debt ceiling, the Treasury can only spend from its TGA. Currently, the TGA balance is USD 722 billion.

The first big assumption is when politicians will agree to raise the debt ceiling. This will be the first test of Trump's popularity among Republican legislators. Remember, his governing majority—Republicans over Democrats in both the House and Senate—is very slim. There's a faction within the Republican Party that loves to chest-thump and swagger around claiming they care about shrinking the bloated size of government, as they do every time the debt ceiling is discussed. They'll insist on voting to raise the debt ceiling until they get juicy returns for their districts. Trump has already failed to convince them to veto spending bills at the end of 2024 without raising the debt ceiling. Democrats, having been clobbered in the last election over gender-neutral bathrooms, won't be eager to help Trump free up government funds to achieve his policy goals. Harris in 2028, anyone? In reality, the Democratic presidential nominee will be Silver Fox Gavin Newsom. So, to get things done, Trump would be wise to exclude the debt ceiling from any proposed legislation unless absolutely necessary.

Raising the debt ceiling becomes necessary when not raising it would lead to a technical default on maturing Treasuries or a complete government shutdown. Using the Treasury's published revenue and expenditure data for 2024 as a reference, I estimate this will happen between May and June this year, when the TGA balance will be completely depleted.

It's helpful to visualize the speed and intensity at which the TGA is used to fund the government and predict when withdrawals will have the greatest impact. The market is forward-looking. Given that these are public data and we know how the Treasury operates when it cannot increase the total US debt as the account approaches depletion, the market will seek new sources of USD liquidity. At 76% depletion, March seems like the time when the market will ask, "What's next?"

If we add up the USD liquidity amounts from the Fed and Treasury until the end of the first quarter, the total is USD 612 billion.

What Happens Next?

Once default and shutdown are imminent, a last-minute agreement will be reached, and the debt ceiling will be raised. At that point, the Treasury will again be free to borrow net and must refill the TGA. This will be a negative for USD liquidity.

Another important date in the second quarter is April 15, when tax payments are due. As can be seen from the table above, the government's fiscal position improves significantly in April, which is a negative for USD liquidity.

If the factors affecting the TGA balance were the only ones determining cryptocurrency prices, I would expect the market top at the end of the first quarter. In 2024, Bitcoin hit a local high of around USD 73,000 in mid-March, then consolidated and began a months-long decline before the 15th tax deadline on April 11.

Trading Strategies

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

• Will China accelerate or decelerate the creation of yuan credit?

• Will the Bank of Japan start raising policy rates, thereby strengthening the USD against the yen and unwinding leveraged carry trades?

• Will Trump and Besent sharply devalue the USD against gold or other major fiat currencies overnight?

• How effective will the Trump team be in swiftly cutting government spending and passing legislation?

None of these major macroeconomic questions can be known in advance, but I am confident in the mathematical principles