The continued drop in the “USD Liquidity Index” makes it hard to tell if Bitcoin will go up or down.
In eight of the last 12 years, Bitcoin did better in October than it did in September. But because USD liquidity is going down, the bullish seasonality might not happen this year.
October has been a good month for bitcoin (BTC), and traders may be looking forward to taking advantage of the bullish seasonality after seeing the cryptocurrency stay steady during recent traditional market turmoil.
Historical data from the charting platform Trading View shows that Bitcoin has done well in October in eight out of the last twelve years, with an average return of around 30%. In other words, 66% of the time, returns have been good in October.
But one indicator that tracks the liquidity of the U.S. dollar says that bulls should be careful.
A chart from Trading View shows that the so-called USD Liquidity Condition Index has dropped to a level that hasn’t been seen in 19 months. This level is $5.7 trillion.
In a daily market update, Lewis Harland, a researcher at Decentral Park Capital, said, “The Fed’s net dollar liquidity is falling off a cliff.” This is a clear headwind for the prices of crypto assets.
The index measures how liquid the dollar is based on how three factors interact: the size of the Federal Reserve’s balance sheet, the Treasury General Account (TGA), and the reverse repo balance held at the New York Fed.
When the Fed’s balance sheet shrinks and the TGA and repo balances go up, liquidity goes down. On the other hand, an increase in the Fed’s balance sheet and a drop in the TGA and repo balances show that the dollar is becoming more liquid.
The Fed’s tightening cycle began in March of this year, and since then, borrowing costs have gone up by 300 basis points. In the coming months, the central bank is likely to raise interest rates again, bringing the benchmark rate to 4.7%. The bank is also cutting its balance sheet size by $90 billion per month.
Arthur Hayes, co-founder and former CEO of crypto spot and derivatives exchange BitMEX, wrote in a blog post on August 23 that major highs and lows in the price of bitcoin have lined up with local peaks and troughs in the dollar liquidity index. He called bitcoin “a high-powered measure of USD liquidity.”
With the dollar liquidity index falling to a new low for the year, it seems unlikely that bitcoin will make gains in October, which is usually a bullish month.
With the dollar liquidity index falling to a new low for the year, it seems unlikely that bitcoin will make gains in October, which is usually a bullish month.
Harland wrote that “it may be the last straw that breaks the camel’s back,” referring to the fact that a continued tightening of the dollar’s liquidity could cause a final capitulation slide in bitcoin.
At press time, Bitcoin was trading for $19,630. Since Sept. 21, neither buyers nor sellers have been willing to set the price, so it has been stuck between $18,000 and $20,000.