Bitcoin follows market liquidity. The change in bank reserves at the Fed will not begin to increase until April

Since December or so, the behavior of the bitcoin price, in terms of the direction rather than the scale of the movement, has been quite similar to the change in bank reserves Fed. Bank reserves at the Fed were built up very quickly when the Federal Reserve was conducting its QE program. This, in turn, as we know, led to an increase in the prices of risky assets and a boom in virtually everything. Currently, these reserves are the highest since April 2022, although the Fed does not maintain them QE, and even conducts QT and reduces its balance sheet by USD 95 billion per month. However, reserves are growing.

Reverse repo and liquidity database

The constantly decreasing reverse repo, i.e. the excess liquidity of the financial sector in the US, which is a derivative of what happened during the pandemic, is responsible for the increase in bank reserves at the Fed. This excess liquidity was approximately USD 2,5 trillion in December 2022, and now there is less than USD 500 billion left. This means that USD 2 trillion entered the financial system despite restrictive monetary policy, which could have helped to increase the prices of risky assets, including Bitcoin.

From the point of view of the liquidity base, the price of bitcoin correlates better not so much with the level of bank reserves at the Fed, but with their change on an annual basis. Until the beginning of March, we observed an increase in reserves by over USD 620 billion y/y, and due to the aid program for banks from a year ago and their massive increase then, we currently see a decline in liquidity growth to USD 373 billion y/y. This is a significant change.

Bitcoin with a chance for a larger correction?

A number of macroeconomic factors seem to be unfavorable for risky assets, as firstly, liquidity growth is declining, secondly, inflation is not falling as quickly as expected, and US bond yields rose this week by the most since October 2023. Thus, the chances of a correction are increasing bitcoin prices towards the low of March 5, i.e. around USD 59, which could mean a 000% correction from the peak of over USD 20.

When will the chances of increasing liquidity increase? 

At the moment, it seems that the deadline is the end of March and the end of the first week of April. After April 9, liquidity should increase again on an annual basis, which may once again start to support risky assets, including the price of bitcoin. It is also possible that the market will then try to play along with the Fed's interest rate cuts, which may result in a decline in yields and, along with an increase in liquidity, help risky assets. However, the next three weeks may be bumpier for investors than the smooth ride to new highs so far.