Bitcoin and Stock Markets Strain Under $400B Liquidity Pressure from U.S. Treasury

What to Know:

Bitcoin and other major cryptocurrencies have dropped notably, with the CoinDesk 80 Index declining by 13% since last Thursday.
Analysts suggest that the decline in both cryptocurrency and stock markets is mainly due to the anticipated liquidity strain from the U.S. Treasury General Account (TGA).

Key Observations

Move over Jackson Hole and inflation fears. The real cause of the downturn in crypto and stock markets appears to be the imminent liquidity drain from the U.S. government’s Treasury General Account (TGA), a checking account held at the Federal Reserve that is expected to experience a significant buildup.

Bitcoin has fallen over 8% to $113,500 since reaching all-time highs above $124,000 last Thursday, according to CoinDesk data. The prices of other significant tokens, including ether (ETH) and XRP, have also seen corrections, contributing to the broader market decline.

Liquidity Pressures

Most market analysts attribute these losses to a cautious approach taken by investors in anticipation of Federal Reserve Chair Jerome Powell’s upcoming speech at the Jackson Hole event. Nevertheless, David Duong argues that the primary driver is fear surrounding the liquidity drain from the expected TGA refill.

“Jackson Hole and PPI are merely justifications for market participants to reduce risk ahead of the U.S. Treasury’s ~$400B TGA liquidity drain in the coming weeks,” Duong said on X.

Understanding the Treasury General Account

The Treasury General Account operates as the U.S. government’s primary account at the Federal Reserve, facilitating the collection of various receipts and government payments. Just like personal savings accounts, the TGA balance fluctuates daily based on incoming and outgoing funds.

TGA Refill Dynamics

As of late July, the TGA balance surged from about $320 billion to over $500 billion. According to MacroMicro, the Treasury may need to issue $500-$600 billion in new debt over the next few months, creating liquidity challenges due to tightening market conditions.

Given the delicate current financial landscape, potential disruptions could arise if the Federal Reserve continues its tightening policy. David Duong’s analysis illustrates that liquidity constraints present substantial hurdles for BTC bulls aiming for significant upward momentum as the year closes.