Arthur Hayes, co-founder and former CEO of BitMEX, who now manages a family office called Maelstrom, outlined three key macroeconomic variables in March that could lead to a “malicious outflow of all crypto tourists.”
The conflicting variables are related to the Fed’s Reverse Repo Program, the Bank Term Funding Program and the March interest rate decision, Hayes wrote in a blog post on Thursday.
RRP is a central bank tool that helps manage short-term liquidity by using securities such as government bonds as collateral, allowing financial institutions to earn a return on their cash reserves. BTFPs allow central banks to provide long-term loans to commercial banks using similar high-quality assets as collateral, helping to stabilize the banking sector.
Hayes argues that liquidity has flowed into financial markets through the decline in RRP balances, which he expects to bottom out in early March based on the rate of decline in 2023. Then you need another source of dollar liquidity. “I’m going,” he said. “I believe that without other new sources of dollar liquidity, bonds and stocks, cryptocurrencies will also suffer. “I invested in cryptocurrencies in the second half of 2023 and I believe the period from now until April is a no-trade zone in terms of added risk.”
Another risk comes from BTFP, which is scheduled to expire on March 12. Hayes suggested that U.S. Treasury Secretary Janet Yellen could initially refuse to renew the program, potentially leading to financial instability due to a further reduction in liquidity. This decision could trigger a chain reaction, impacting the banking sector and wider financial markets, including cryptocurrency assets.
But if this causes a few large enough banks to fail, similar to the collapse last March, Hayes argues that Yellen will have to renew the program. “The combination of the lack of liquidity flowing from RRPs and the lack of printed currency to cover bond losses on bank balance sheets will depress financial markets around the world,” he said. “This is a correlation of one moment in time. “As markets heat up at the prospect of free markets working once again and liquidating the system of insolvent banking institutions, all assets, including cryptocurrencies, will collapse with them.”
The March 20 Fed meeting also looms large in Hayes’ analysis, with the central bank likely to begin cutting interest rates by at least 0.25% for the first time since it began raising rates in March 2021.
“If my predictions are correct, the market will likely drive a few banks out of business within that period, causing the Fed to cut interest rates and announce the reopening of BTFP,” Hayes wrote. This sequence of events was argued to be important in determining the future availability of BTFP. Dollar liquidity from the Federal Reserve and the U.S. Treasury.
Impact on Cryptocurrency Market
In this scenario, Hayes expects Bitcoin to “correct meaningfully” around March 12 along with broader financial markets, but expects it to rebound before the Federal Reserve meeting amid expectations of additional liquidity injections. “I expect Bitcoin to experience a healthy 20-30% correction regardless of the levels it achieved by early March,” Hayes said. “The downturn could be even more severe if U.S.-listed spot Bitcoin ETFs have already begun trading.”
“Imagine the prospect of hundreds of billions of dollars of fiat inflows into these ETFs in the future, pushing Bitcoin above $60,000 and closer to its all-time high of $70,000 in 2021,” he added. “I could easily see a 30-40% correction due to the dollar liquidity carpet. This is why you will not be able to purchase Bitcoin until after the March decision date.”
However, Hayes expects the cryptocurrency market to resume positive trends by the end of March amid speculation surrounding the impact of April’s halving event, which saw Bitcoin’s block reward cut in half.
Alternative Scenarios and Global Curveball
Hayes acknowledged that if his theory is wrong, the fall in RRP could be more gradual, either maintaining liquidity in the second quarter, allowing BTFP to extend beyond its March deadline, or making the Fed’s interest rate decision less important for the overall market. irritant.
Additionally, global events, such as China injecting significant yuan credit into global markets or Japanese investors selling U.S. Treasury bonds for higher-yielding Japanese bonds, could change forecasts, Hayes said.
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