Crypto markets could be facing a downturn as liquidity tightening resumes after the U.S. debt ceiling is lifted. This scenario will likely see the replenishment of the U.S. Treasury General Account (TGA) and the Federal Reserve (Fed) winding down its balance sheet, removing hundreds of billions of dollars from the financial system. These factors could put pressure on cryptocurrency prices in the coming months.
Earlier this year, thawing liquidity conditions had helped lift the prices of risk assets, such as equities and digital assets, during the crypto rally. This rally had pushed bitcoin‘s (BTC) prices to as high as $31,000, leading to the meme coin speculative frenzy that resembled a bull market top. However, this trend may reverse as U.S. lawmakers approve raising the government’s ability to issue new debt, simultaneously putting pressure on risky investments.
Risky assets, such as cryptocurrencies and metaverse projects, are usually more sensitive to liquidity conditions. Analyst Noelle Acheson noted that the U.S. Treasury drawing down its account at the Fed had been one of the tailwinds for the market earlier this year. She explained how money that would normally just sit with the government was being put into the economy. As the situation reverses, Acheson expects the government to replenish its TGA by issuing debt which will draw liquidity out of the market, negatively affecting crypto prices.
This development coincides with the Fed’s quantitative tightening campaign, which seeks to reduce its bloated balance sheet accumulated during the pandemic. Macro analyst Lyn Alden refers to this as a “negative double-whammy for liquidity.” Investors should prepare for volatility, be aware of their holdings, and avoid excessive leverage during these uncertain times.
Furthermore, the debt ceiling resolution bill could
Source: Coindesk
