Bitcoin and Stocks Decline Due to $400B U.S. Treasury Liquidity Drain
The recent decline in crypto and stock markets is primarily attributed to an impending liquidity drain related to the U.S. government's Treasury General Account (TGA). Key points include:
- Bitcoin (BTC) dropped over 8% to $113,500 from record highs above $124,000.
- Other major cryptocurrencies like ether (ETH), XRP, and solana's SOL also corrected, contributing to a 13% drop in the CoinDesk 80 Index.
- The tech-heavy Nasdaq index fell nearly 1.40% to $23,384 after reaching a record high of $23,969.
- Market commentary associates losses with investor de-risking ahead of Federal Reserve Chair Jerome Powell’s speech at Jackson Hole.
- Analyst David Duong suggests the sell-off is mainly due to fears of a $400 billion TGA liquidity drain.
Treasury General Account Overview
The TGA is the U.S. government's operating account at the Federal Reserve, fluctuating with tax receipts and payments. A rebuild of the TGA balance from roughly $320 billion to over $500 billion since late July indicates potential new debt issuance of $500-$600 billion in the coming months.
Current Liquidity Environment
According to Delphi Digital, the current financial system lacks liquidity buffers compared to previous years, with tighter balance sheets and diminished foreign demand for Treasuries. This may lead to increased funding rates impacting broader risk assets, including cryptocurrencies.