Depletion of the Fed’s reverse repo program and the expiry of a crucial funding facility for troubled banks may trigger a market crash in March and force the Fed to cut interest rates, according to Maelstrom CIO Arthur Hayes. While crypto investors are eagerly awaiting the decision on a spot bitcoin exchange-traded fund (ETF) that could potentially drive BTC’s price even higher, Hayes has issued a warning about a potential plunge in the next few months.
In a blog post on Friday, Hayes outlined the looming risks for U.S. banks and markets that could collide in March, potentially leading to a liquidity rug pull event similar to the banking crisis experienced last year. “I am preparing for a vicious washout of all the crypto tourists in March of this year,” he wrote. Hayes, who loaded up on crypto in the second half of 2021, believes that the period from now until April is a no-trade zone in terms of adding risk.
One of the factors contributing to this potential market crash is the drawdown of the Federal Reserve’s reverse repo program (RRP). The RRP allowed qualified banks and investment firms to park cash and earn interest on it, injecting capital into the markets as participants took out cash from the facility and invested elsewhere. However, the RRP balance is rapidly declining, dropping from a record high of $4.5 trillion at the end of 2021 to $1.5 billion currently. Hayes projects that it will reach its historical average of $200 billion by around March. “When this number gets close to zero, the market will wonder what is next,” he said.
Another crucial factor is the expiration of the Bank Term Funding Program (BTFP) in March. The BTFP provided banks with funding to fulfill deposit withdrawals by lending them money at the notional value of their U.S. government bond holdings, at much better conditions than selling bonds on the open market at a loss due to the Fed’s aggressive rate hikes. Hayes expects that the facility won’t be extended during this U.S. presidential election year, which could lead to the bankruptcy of some banks sitting on massive unrealized losses on their bond holdings.
The combination of a lack of liquidity from the RRP and the lack of printed money to cover the bond losses on non-TBTF (too big to fail) banks’ balance sheets could have a devastating impact on global financial markets, according to Hayes. He predicts that as the market rout ensues, the Fed will cut rates at its March meeting and resume the BTFP funding line.
If Hayes’ scenario plays out, bitcoin’s price is expected to correct to a healthy $30,000 to $40,000 range from early March prices. The decline could be as much as 50% if BTC rallies to $100,000 in the coming weeks, he wrote. However, Hayes believes that bitcoin will initially decline sharply with the broader financial markets but will rebound before the Fed meeting. He argues that bitcoin is the only neutral reserve hard currency that is not a liability of the banking system and is traded globally.
Hayes’ warning aligns with other recent forecasts of a correction in the crypto markets. CryptoQuant suggested that a spot-based ETF approval would be a “sell the news” event, potentially causing BTC to drop to $30,000. K Research also advised reducing exposure as the market became overheated. Currently, bitcoin is trading above $40,000.
Matrixport’s head of research, Markus Thielen, has also warned about a potential bitcoin correction based on technical indicators. He believes that the SEC may put off ETF decisions due to shortcomings in the filings. This report may have contributed to a nearly 10% decline in bitcoin’s price earlier this week.
In conclusion, Arthur Hayes, the CIO of Maelstrom, has issued a warning about a potential market crash in March due to the depletion of the Fed’s reverse repo program and the expiry of a crucial funding facility for troubled banks. He predicts that bitcoin’s price could correct to a healthy range of $30,000 to $40,000 if his scenario plays out. However, he believes that bitcoin will rebound before the Fed meeting, as it is the only neutral reserve hard currency not tied to the banking system. Other analysts have also forecasted a correction in the crypto markets, citing factors such as a potential ETF approval and technical indicators.