Continued Drop in ‘USD Liquidity Index’ Muddles Bitcoin Stock’s Bullish Seasonality

Bitcoin stock

The month of October has been a good one for bitcoin stock (BTC), and investors may be looking forward to capitalizing on the bullish seasonality, having witnessed the cryptocurrency maintain its stability notwithstanding recent upheaval in traditional markets. 

Bitcoin Stock Performance

According to historical data obtained from the charting platform TradingView, Bitcoin has had a positive performance in the month of October in eight out of the past 12 years, with an average return of almost 30%. To put that another way, October has been shown to produce positive returns 66% of the time. 

However, one indicator that tracks the liquidity of the United States dollar advises for the bulls to exercise prudence at this time. 

According to a graphic that was given by TradingView, the so-called USD Liquidity Condition Index has dropped to a level that is 19 months below its previous low of $5.7 trillion. 

Lewis Harland, a researcher at Decentral Park Capital, stated in a daily market report that “The Fed net [dollar] liquidity is going off a cliff, a clear headwind for crypto asset prices.” Harland’s comments were made in reference to the Fed’s tightening monetary policy. 

The interaction of three factors is used to determine the degree to which the dollar is liquid. These factors are 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. The index is used to evaluate the degree of dollar liquidity. 

When the Fed’s balance sheet is reduced, the TGA and repo balances both increase, which leads to a decrease in liquidity. On the other hand, an increase in the size of the Fed’s balance sheet as well as a decrease in the TGA and repo balances are both indicative of an increase in the liquidity of the dollar. 

This year, the Federal Reserve began its cycle of tightening monetary policy in March, and since then, interest rates on loans have increased by 300 basis points. In the next months, it is expected that the central bank would implement additional rate hikes, bringing the benchmark interest rate up to 4.7%. In addition, the size of the bank’s balance sheet is decreasing at a rate of $90 billion every single month. 

Since 2021, major price peaks and troughs in bitcoin stock have coincided with local peaks and troughs in the dollar liquidity index. This was detailed in a blog post published on August 23 by Arthur Hayes, co-founder and former CEO of the cryptocurrency spot and derivatives exchange BitMEX. Hayes also referred to bitcoin stock as “a high powered measure of USD liquidity.” 

Because the dollar liquidity index has reached a new low for this point in the year, it would appear that the odds are stacked against bitcoin making gains in the month of October, which is typically a bullish month. 

“It may be a final straw that broke the camel’s back,” Harland wrote, referring to the possibility of a final capitulation slide in bitcoin stock as a result of a continued tightening of the dollar’s liquidity. Harland was referring to the possibility of a final capitulation slide in bitcoin as a result of the continued tightening of the dollar liquidity. 

At the time of this publication, one bitcoin could be purchased for $19,630. Since the 21st of September, both buyers and sellers have been unable to lead the price movement, which has resulted in the cryptocurrency remaining rangebound between $18,000 and $20,000.

Featured Image: Megapixl @ Hello6373

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