Prepare for pain in the digital asset market.
Bitcoin (BTC), the top cryptocurrency by market capitalization, will likely come under selling pressure in the days surrounding the mining reward halving scheduled for April 20, a likely bullish event.
This is a message from Arthur Hayes, co-founder and former CEO of cryptocurrency exchange BitMEX and chief investment officer at Maelstrom.
In his latest blog post, Heatwave, Hayes explained that the bullish halving theory is “firmly entrenched” and leaves the door open for a so-called price correction. In cryptocurrencies, a correction is considered a price decline of at least 10%.
This bullish narrative stems from data showing that Bitcoin tends to record impressive multi-month rallies in the months following a halving, with halvings increasing the rate of supply expansion every four years. This is an event that causes a 50% decrease. With this halving, the amount issued per block will decrease from 6.25 BTC to 3.125 BTC.
“The theory that halvings are positive for crypto prices is well established,” Hayes wrote. “When most market participants agree on a particular outcome, the opposite usually happens. That is why I believe Bitcoin and crypto prices in general will decline around the halving.”
Analysts say the supply slowdown has been priced in and the market could adjust in response to the event. Bitcoin has risen more than 65% this year, setting a new record of over $70,000 well before the halving.
Hayes said the upcoming U.S. tax payment on April 15th and the Federal Reserve's quantitative tightening (QT) policy will combine to remove dollar liquidity from the market, leading to widespread risk aversion and uncertainty surrounding the halving. He added that this could lead to a fire sale of crypto assets.
“Given that the halving will take place at a time when dollar liquidity is tighter than usual, it will likely spur a furious sell-off of crypto assets. That adds further weight to my decision,” Hayes said. .
Tax payments typically drain liquidity from the financial system as individuals withdraw cash from bank deposits or market funds to pay their dues.
As dollar liquidity dries up, the dollar appreciates against other fiat currencies, and borrowers on dollar-denominated loans face increased interest payments and reduced exposure to risky assets such as cryptocurrencies and technology stocks. become. A weaker dollar has the opposite effect. As the world's reserve currency, the US dollar plays a major role in global trade, non-bank borrowing, and international debt.
The liquidity drain from impending tax payments could be huge, thanks to capital gains from a booming stock market and interest income from rising interest rates. This means that the balance in the Treasury General Account (TGA) will rise sharply in the second half of April. The TGA is a government operating account maintained at the Federal Reserve to collect revenues from taxes, duties, securities sales, and receivables and to cover government expenditures.
“The TGA balance will increase as the Treasury receives the tax payments. As the tax payments are processed on April 15, we expect the TGA balance to grow significantly above its current level of approximately $750 billion,” Hayes said. “This is negative dollar liquidity.” “The period of instability for risk assets is from April 15th to May 1st.”
Hayes expects Treasury Secretary Janet Yellen to unwind the Treasury General Account after May 1, providing a bullish tailwind for risk assets in the months leading up to the US presidential election in November.
“Since May 1st, the pace of QT has slowed and Yellen has been busy cashing checks to drive up asset prices. If you are a trader looking for an opportunity to place a cheeky short position, April is the perfect month. “It's time for a return to normal program after May 1st…asset inflation due to financial fraud by the Federal Reserve and the U.S. Treasury,” Hayes wrote.
