BTC Price, Crypto Market Braces For Slowing Liquidity Shock Ahead, Observers Say

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Crypto markets are bracing for a slowdown as the liquidity crunch resumes following the lifting of the US debt ceiling, observers have said.

The replenishment of the US Treasury General Account and the liquidation of its balance sheet by the Federal Reserve (Fed) will remove hundreds of billions of dollars from the financial system, weighing on cryptocurrency prices in the coming months.

The thaw in liquidity conditions earlier this year helped drive up the prices of risky assets, including equities and digital assets. The market-wide crypto rally propelled bitcoin (BTC), the largest cryptocurrency by market capitalization, as high as $31,000 before erupting into a meme coin speculative frenzy reminiscent of the bull run. sugar near bull market highs.

The trend, however, is expected to reverse once U.S. lawmakers approve increasing governments’ ability to issue new debt, which will put pressure on risky investments.

First, the US Treasury will need to replenish its nearly depleted Treasury General Account (TGA), which means replenishing some $500 billion of financial system liquidity.

This should particularly hit risky assets as they tend to be more sensitive to liquidity conditions than safer plays such as bonds and many equity groups, said macro analyst Noelle Acheson.

The Treasury pulling on its account at the Fed was one of the tailwinds for the market earlier this year as money that would normally sit there was poured into the economy in the form of government spending, explained Acheson.

Now, the reverse is likely to happen: the government must replenish the balance of this account by issuing debt that will withdraw cash from the market and return it to the Treasury account.

The replenishment of the general account coincides with the Fed’s continuation of its quantitative tightening campaign, briefly interrupted in March due to the regional banking crisis, to reduce its bloated balance sheet of support for the economy during the pandemic.

Macro analyst Lyn Alden called this a double whammy for liquidity in a market report.

The attractiveness of many large liquidity-focused stocks is lackluster for the next few months unless or until we get more clarity on forward liquidity conditions, Alden said. This is an environment in which an investor must know what they own, prepare for volatility, and avoid excessive leverage.

The debt ceiling resolution bill, if passed in its current form, will also contribute to the negative impact on liquidity, according to Tom Dunleavy, founder of Dunleavy Investment Research.

Some key points of the agreement, such as cutting non-defense funding, recovering unspent pandemic relief funds and resuming student loan repayments, will limit the money available to consumers for invest, he explained in a tweet. “Liquidity is going to be very sharply negative,” Dunleavy added.

The US House of Representatives is set to vote on raising the debt ceiling on Wednesday night.

Tighter liquidity conditions, waning likelihood of the Fed cutting interest rates this year, and the current trading environment with depressed volatility and volumes make crypto markets ripe for a shock, the platform wrote. FalconX institutional trading form in a newsletter.

This macro scenario (…) makes me believe that we could be in a moment of calm before the storm for crypto, said David Lawant, head of research at FalconX.

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