Bitcoin Could Slump Around Reward Halving Time, Arthur Hayes Says

Gear up for some pain in the digital assets market.

Arthur Hayes, who is both a co-founder and former CEO of BitMEX, as well as the current CIO at Maelstrom, has shared this perspective.

In his recent blog entry titled “Heatwave,” Hayes expressed that the optimistic viewpoint regarding Bitcoin’s halving has become widely accepted. This situation might lead to a potential decrease in price by more than 10% in the crypto market, which is referred to as a correction.

The optimistic outlook for bitcoin comes from historical data indicating significant gains in the months following each halving. During this process, the rate of new supply creation is cut in half every four years. In this instance, the upcoming halving will decrease the number of new bitcoins created per block from 6.25 to 3.125.

“According to Hayes’ perspective, the belief that cryptocurrency prices will rise following a halving event is widely accepted. However, he asserts that when the majority of market participants hold this view, it often results in the opposite outcome. Consequently, he anticipates a price drop for Bitcoin and cryptos around the time of the halving.”

Multiple experts believe that the market may experience a correction after the anticipated event, since they argue that the supply decrease has already been factored in and significantly boosted Bitcoin’s price by over 65% this year, reaching new peaks above $70,000 before the halving even occurred.

Tax payments to suck out liquidity

The tax payments U.S. residents need to make by April 15, combined with the Federal Reserve’s quantitative tightening policies, may reduce the amount of dollars in circulation, triggering widespread risk aversion and a panic sale of crypto assets around the time of their halving events.

If the cryptocurrency halving takes place when there’s less dollar liquidity than normal, it could intensify the selling frenzy of crypto assets. This consideration makes me hesitant to trade before May. (Hayes’ statement paraphrased)

Normally, people take money out of the financial system by paying taxes in the form of withdrawing cash from savings accounts and market funds.

When the supply of US dollars on the market decreases, causing a shortage, the value of the dollar goes up compared to other currencies. Borrowers with loans in US dollars face increased interest costs and may reduce their investments in riskier assets such as cryptocurrencies and tech stocks. Conversely, when the US dollar weakens and there’s an abundance of it on the market, its value goes down against other currencies, resulting in lower borrowing costs for non-US entities and easier access to international markets for debt and trade. The US dollar holds significant influence over global commerce, lending, and international financial obligations due to its status as a major reserve currency.

In the second half of April, significant withdrawals from the Treasury General Account (TGA) are anticipated due to upcoming tax payments. These payments could be substantial as a result of capital gains earned from thriving stock markets and increased interest income stemming from heightened interest rates. The TGA is an account at the Federal Reserve where the government deposits revenue from taxes, customs duties, securities sales, and debt receipts to cover its expenses.

“When the Treasury receives tax payments, the TGA balance rises. I expect the TGA balance to swell well above the current ~$750 billion level as tax payments are processed on April 15th. This is dollar liquidity negative,” Hayes said. “The precarious period for risky assets is April 15th to May 1st.”

Starting from May 1, it is anticipated that Janet Yellen, as the Treasury Secretary, will decrease the balance in the Treasury General Account. This action could potentially boost the performance of risky assets during the period preceding the U.S. presidential election in November.

Starting from May 1st, the rate at which the Federal Reserve implements quantitative tightening (QT) decreases. Meanwhile, former Chair Yellen begins collecting her checks, aiming to boost asset prices. For traders seeking a short position with potential profitability, consider April as your month of choice. Post-May 1st, we resume our regular economic programming, featuring asset inflation driven by the Fed and U.S. Treasury’s financial maneuvers.