Crypto markets could be in for a downturn when the U.S. debt ceiling resolution is passed by the House of Representatives. This is because replenishing the Treasury General Account (TGA) and the Federal Reserve winding down its balance sheet will remove hundreds of billions of dollars from the financial system, impacting cryptocurrency prices.
Earlier this year, thawing liquidity conditions enabled the prices of risk assets, such as digital assets, to rise. This pushed Bitcoin (BTC) to as high as $31,000. However, now the trend is reversing as the U.S. government needs to issue new debt to refill its TGA, a move which will suck liquidity out of the market.
Macro analysts Noelle Acheson and Lyn Alden have both commented on the situation, with the latter describing it as a “negative double-whammy for liquidity”. David Lawant, head of research at FalconX, believes this macro scenario is leading to a “calm-before-the-storm moment” for crypto.
Investors should be aware of the liquidity conditions and be prepared for volatility. Leverage should also be avoided in this environment. With reduced volatility and volumes, crypto markets may be prone to shocks when liquidity tightens.
