Get ready for some problems in the digital asset market.
Bitcoin (BTC), the leading cryptocurrency by market value, is likely to face selling pressure in the days before and after the mining rewards halving due on April 20, a supposedly bullish event.
That's the message from Arthur Hayes, co-founder and former CEO of crypto exchange BitMEX and chief investment officer at Maelstrom.
In his latest Heatwave blog post, Hayes explained that the bullish halving narrative is “firmly entrenched,” leaving the door open for a so-called price correction. For cryptocurrencies, a correction is considered a price drop of at least 10%.
The bullish narrative comes from data showing that Bitcoin tends to post outstanding multi-month rallies in the months following the halving, an event that reduces the pace of supply expansion by 50% every four years. This time, the halving will reduce the issuance per block from 6.25 BTC to 3.125 BTC.
“The narrative that the halving will have a positive impact on crypto prices is firmly entrenched,” Hayes wrote. “When most market participants agree on a particular outcome, the opposite usually occurs. That’s why I believe Bitcoin and cryptocurrency prices in general will collapse around the halving.”
Several analysts have argued that the supply slowdown is priced in and the market could correct following the event. Bitcoin is up over 65% this year and set new records above $70,000 well before the halving.
Hayes added that US tax payments due on April 15, coupled with the Federal Reserve's quantitative tightening (QT) policies, could remove dollar liquidity from the market, leading to widespread risk aversion and fire selling of crypto assets around the halving could.
“Given that the halving comes at a time when dollar liquidity is tighter than usual, it will drive a rapid sell-off in crypto assets. The timing of the halving adds additional weight to my decision not to trade until May,” said Hayes.
Tax payments typically drain liquidity from the financial system as individuals withdraw cash from bank deposits and market funds to pay their contributions.
As the dollar's liquidity dries up, it appreciates against other fiat currencies, and borrowers with dollar-denominated loans face higher interest expenses and reduced exposure to risk assets such as cryptocurrencies and technology stocks. The weakening of the dollar has the opposite effect. The U.S. dollar, a global reserve currency, plays an outsized role in global trade, nonbank borrowing and international debt.
Cash outflows due to upcoming tax payments could be significant thanks to capital gains from booming stock markets and interest income from increased interest rates. In other words, the balance in the Treasury General Account (TGA) is expected to rise sharply in the second half of April. The TGA is the government's operating account maintained at the Fed to collect tax revenues, tariffs, securities sales proceeds, and debt income, and to cover government expenditures.
“When the Treasury receives tax payments, the TGA balance increases. I expect the TGA balance to rise significantly above the current level of around $750 billion as tax payments are processed on April 15th. This is negative for dollar liquidity,” Hayes said. “The precarious period for risky assets is April 15th to May 1st.”
Hayes expects Treasury Secretary Janet Yellen to wind down the Treasury's overall account after May 1, providing upward momentum for risk assets in the months leading up to November's U.S. presidential election.
“After May 1, the pace of QT slows down and Yellen is busy cashing checks to drive up asset prices. If you are a trader looking for an opportune time to take a cheeky short position, the month of April is the perfect time to do so.” Do this. After May 1, it’s back to regular programming…asset inflation encouraged by financial shenanigans by the Fed and the U.S. Treasury,” Hayes wrote.
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