Arthur Hayes: Trump's policy shift, Bitcoin's bottom confirmed, will it trigger a new trend in the crypto market?

My Hokkaido ski season ended in mid-March. Yet lessons learned on the mountain can still be applied to President Trump's tariff tantrums. Every day is different, and so many variables interact—no one knows which snowflake or ski turn will trigger an avalanche. The best we can do is roughly estimate the probability of triggering an avalanche. A more definitive technique for assessing slope instability is "ski cutting."

Before the descent, one of the group's skiers will traverse the starting area, jumping up and down, in an attempt to trigger an avalanche. If successful, how the avalanche propagates across the face of the slope will determine whether the guide considers the slope safe to ski. Even if an avalanche is triggered, we may still ski the slope, but will choose areas carefully to avoid triggering an avalanche larger than a loose powder slide. If we see a crack spreading rapidly or a huge slab of snow breaking apart, we need to get out of the way.

The key is to try to quantify the worst-case scenario based on current conditions and act accordingly. Trump’s self-proclaimed “Liberation Day” of April 2 was a ski cut down this steep and dangerous slope of global financial markets. Team Trump borrowed tariff policy from an economics trade book called “Balancing Trade: The Cost of Ending America’s Unbearable Trade Deficits” and took an extreme position . The announced tariff rates were worse than the worst-case predictions of mainstream economists and financial analysts. In avalanche theory terms, Trump triggered a persistent avalanche of weak layers that threatened to bring down the entire fake fractional reserve dirty fiat financial system.

The initial tariff policy represented a worst-case scenario, as both the United States and China took extreme positions that were in opposition to each other. While the wild swings in financial asset markets led to trillions of dollars in losses worldwide, the real problem was the rise in volatility in the U.S. bond market, as measured by the MOVE index. The index almost hit an intraday high of 172 before the Trump team quickly evacuated the danger zone. Within a week of announcing the tariffs, Trump adjusted his plan, suspending the implementation of tariffs on all countries except China for 90 days.

Then, Boston Fed President Susan Collins wrote in the Financial Times that the Fed stood ready to do whatever was necessary to ensure that markets functioned properly, and a few days later, when volatility refused to drop significantly. Finally, U.S. Treasury Secretary Scott Bessant said in an interview with Bloomberg (BBC) that his department could significantly increase the pace and amount of Treasury buybacks. I described this series of events as a shift among policymakers from "everything is normal" to "everything is over, we have to do something", the market soared, and most importantly, Bitcoin bottomed. Yes, I declared a local bottom at $74,500.

Whether you characterize Trump’s policy change as a retreat or a savvy negotiating tactic, the result is that the administration deliberately triggered an avalanche in financial markets so severe that a week later they adjusted their policy. Now, as a market, we know a few things. We understand the worst-case scenario for bond market volatility, we recognize the volatility level that triggers a change in behavior, and we also know which monetary levers will be pulled to mitigate that scenario. Using this information, as Bitcoin holders and crypto investors, we know the bottom is in because the next time Trump ratchets up his tariff rhetoric or refuses to reduce tariffs on China, Bitcoin will rise in anticipation that monetary authorities will run the printing presses at maximum “printing” levels to ensure bond market volatility remains subdued.

This article will explore why the extreme stance on tariffs has led to a dysfunctional bond market, as measured by the MOVE index. I will then discuss how Bessant’s solution, Treasury bond buybacks, will add a lot of USD liquidity to the system, even though technically buying old bonds by issuing new bonds does not itself add USD liquidity to the system. Finally, I will discuss why this Bitcoin and macroeconomic landscape resembles Q3 2022, when Bessant’s predecessor Janet Yellen (the bad girl Yellen) increased Treasury issuance to drain the Reverse Repo Program (RRP). Bitcoin hit a local low in Q3 2022 after the FTX event, and now in Q2 2025, Bitcoin hits a local low in this bull run after Bessant launched his “non-QE” QE bazooka.

The greatest pain

I will reiterate that Trump’s goal is to get the U.S. current account deficit down to zero. Doing that quickly will require painful adjustments, and tariffs are his administration’s weapon of choice . I don’t care if you think that’s good or bad. Nor do I care if Americans are ready to work eight-plus-hour shifts in iPhone factories. Trump was elected in part because his supporters felt they were screwed by globalization. His team is hell-bent on delivering on a campaign promise to, as they put it, elevate the concerns of “Main Street” rather than “Wall Street.” All this assumes that the people around Trump can get re-elected this way, which is not a sure thing.

The reason financial markets crashed on “Liberation Day” is that if foreign exporters can’t earn dollars or earn less, they can’t buy or buy less U.S. stocks and bonds. Also, if exporters have to change their supply chains or even rebuild them in the U.S., they have to finance part of that rebuilding by selling liquid assets, like U.S. bonds and stocks. That’s why the U.S. market and any market overexposed to U.S. export earnings crashed.

The bright spot, at least initially, was that spooked traders and investors flocked to Treasuries. Treasury prices rose and yields fell. The 10-year yield fell sharply, which was good for Bessant because it helped him stuff more bonds down the market's throat. But the wild swings in bond and stock prices raised volatility, which is deadly for certain types of hedge funds.

Hedge funds, sometimes hedge… but always use a whole bunch of leverage. Relative value (RV) traders typically identify a relationship or spread between two assets and if the spread widens, they use leverage to buy one asset and sell the other, anticipating mean reversion. Generally speaking, most hedge fund strategies implicitly or explicitly short market volatility in a macro sense. When volatility falls, mean reversion occurs. When volatility rises, things get messy and the stable “relationship” between assets breaks down. This is why risk managers at banks or trading platforms raise hedge funds’ margin requirements when market volatility rises. When hedge funds receive a margin call, they must close their positions immediately or they are liquidated. Some investment banks are happy to kill clients with margin calls during periods of extreme volatility, taking over the positions of bankrupt clients and then profiting when policymakers inevitably print money to drive volatility down.

What we really care about is the relationship between stocks and bonds. Because of their role as the nominally risk-free asset and the global reserve asset, when global investors flee stocks, the price of U.S. Treasuries rises. This makes sense because fiat money has to be put somewhere to earn a yield, and the U.S. government, with its ability to run a printing press at no cost, will never voluntarily go bankrupt in dollar terms. The real energy value of Treasuries can and does decline, but policymakers don’t care about the real value of any of the junk fiat assets that are flooding the world.

In the first few trading days after “Liberation Day,” stocks fell and bond prices rose/yields fell. Then, something happened and bond prices fell along with stocks. The degree of round trip volatility in the 10-year Treasury yield has not been seen since the early 1980s. The question is, why? The answer, or at least what policymakers think the answer is, is extremely important . Is there a structural problem in the market that must be fixed by some form of money printing by the Fed and/or the Treasury?

The bottom panel from Bianco Research shows that the magnitude of the 3-day change in the 30-year Treasury yield is extraordinary. The level of change due to the “tariff tantrum” is comparable to market volatility during financial crises such as the 2020 COVID-19 pandemic, the 2008 Global Financial Crisis, and the 1998 Asian Financial Crisis. This is not good.

The possible unwinding of the RV Fund Treasury basis trade position is a question. How big is this trade?

February 2022 is an important month for the Treasury market as US President Biden decided to freeze the Treasury bond holdings of Russia, the world's largest commodity producer. This actually shows that no matter who you are, property rights are not rights, but privileges. Therefore, foreign demand continues to weaken, but RV funds fill the gap and become marginal buyers of Treasury bonds. The above chart clearly shows the increase in repo positions, which represents the size of basis trade positions in the market.

Basis trading in brief:

Treasury basis trading is when one buys a cash outstanding bond and simultaneously sells a bond futures contract. Margin effects on the bank and trading platform end are important here. The position size of RV funds is limited by the cash margin required. Margin requirements vary depending on market volatility and liquidity issues.

Bank Guarantee:

To get the cash to buy the bonds, the fund enters into a repurchase agreement (repo) transaction, where a bank agrees to provide cash immediately for settlement for a small fee, using the bonds to be purchased as collateral. The bank will require a certain cash margin on the repo transaction.

The more bond prices fluctuate, the more margin the bank requires.

The less liquid a bond is, the more margin banks require. Liquidity is always concentrated in certain tenors of the yield curve. For global markets, the 10-year Treasury is the most important and liquid. When the newest 10-year Treasury bond at the time of issuance is auctioned, it becomes the 10-year bond in circulation, with the highest liquidity. Then, over time, it moves further and further away from the liquidity center and is considered an off-market bond. As the on-market bonds naturally become off-market bonds, the amount of cash required to fund the repo trading platform increases while the funds wait for the basis to collapse.

Essentially, during periods of high volatility, banks worry that if they need to liquidate a bond, the price will drop too quickly and the market has low liquidity to absorb the sell orders. So they raise margin limits.

Futures trading platform margin:

Each bond futures contract has an initial margin level that determines the amount of cash margin required for each contract. This initial margin level fluctuates based on market volatility.

Trading platforms worry about the ability to liquidate positions before the entire initial margin is used up. The faster prices move, the more difficult it is to ensure solvency; therefore, when volatility rises, margin requirements also rise.

Concerns about closing positions:

The huge impact of Treasury basis trades on the market and the way major players self-finance has been a hot topic in the Treasury market. The Treasury Borrowing Advisory Committee (TBAC) provided data in past quarterly refinancing announcements (QRAs) confirming that the marginal buyers of US Treasuries since 2022 are RV hedge funds engaging in basis trades. Here is a link to a detailed paper submitted to the CFTC that relies on data provided by the TBAC in April 2024.

The chain of cyclical market events is amplified in a horrific way in each cycle, as follows:

If bond market volatility rises, RV hedge funds will be required to provide more cash to banks and trading platforms. At a certain point, the funds cannot afford the additional margin calls and must close all positions simultaneously. This means selling spot bonds and buying back bond futures contracts. Liquidity in the spot market falls as market makers reduce the size of their bids at a given spread to protect themselves from the toxicity of one-way flows. As liquidity and prices fall together, market volatility increases further. Traders are well aware of this market phenomenon, and regulators and their financial journalist goons have already sent warning signs about it. So as bond market volatility increases, traders rush to get ahead of the barriers to forced selling, which amplifies volatility on the downside, and things unravel faster.

If this is a known source of market stress, what policies can Bessant unilaterally implement within his department to keep leverage flowing in these RV funds?

Treasury bond repurchase

A few years ago, the Treasury Department began a repo program. Many analysts looked ahead and wondered how this would assist some money printing conspiracy. I will present my theory on the effect of repo on the money supply. But first let’s walk through the mechanics of how the program works.

The Treasury will issue new bonds and use the proceeds to buy back the less liquid exiting bonds. This will cause the exiting bonds to increase in value, possibly even above fair value, because the Treasury will be the largest buyer in an illiquid market. RV funds will see the basis between their exiting bonds and bond futures contracts narrow.

Basis trading = long spot bonds + short bond futures

Cash bond prices rose as off-trade bond prices rose in anticipation of the Treasury purchases.

Therefore, the RV funds will lock in profits by selling the higher priced exiting bonds and closing their short bond futures contracts. This frees up valuable capital on the bank and trading desk side. Since RV funds are in the business of making money, they immediately re-enter the basis trade at the next Treasury auction. As prices and liquidity rise, bond market volatility decreases. This reduces the funds' margin requirements, allowing them to take larger positions. This is pro-cyclical reflexivity at its best.

Now the market will relax, knowing that the Treasury has provided more leverage to the system. Bond prices rise; all is well.

Bessant touts his new tool in interviews because, in theory, the Treasury can do unlimited repo. The Treasury can’t issue bonds without a spending bill approved by Congress. However, repo is essentially the Treasury issuing new debt to pay off old debt, which it has already done for principal payments on maturing bonds. The transaction is cash flow neutral because the Treasury buys and sells the bond with one of the primary dealer banks for the same notional amount, so it doesn’t need the Fed to lend it money to do the repo. So if the size of the repo reduces market fears of a Treasury market collapse and causes the market to accept lower yields on debt that hasn’t been issued yet, then Bessant will go all in on the repo. It won’t stop. It won’t stop.

A note on Treasury bond supply

Bessant knows deep down that the debt ceiling will be raised sometime this year and that the government will continue to spend at an increasingly violent pace. He also knows that Elon Musk, through his Department of Government Efficiency (DOGE), cannot cut spending quickly enough for a variety of structural and legal reasons. Specifically, Elon's savings estimate for this year has dropped from $1 trillion per year to a paltry (at least given the massive size of the deficit) $150 billion. This leads to the obvious conclusion that the deficit may actually widen, forcing Bessant to issue more bonds.

As of now, the deficit for fiscal 2025 ending in March is 22% higher than the same period in fiscal 2024. Give Elon some credit — and I know some of you would rather listen to Grimes burn in a Tesla than do this — he’s only cut two months. More worryingly, business uncertainty about the severity and impact of tariffs, combined with falling stock markets, will lead to a significant drop in tax revenues. This would point to structural reasons for the deficit to continue to widen, even if DOGE succeeds in cutting more government spending.

Bessant fears deep down that he will have to raise his borrowing estimates for this year because of these factors. With a large supply of Treasury bonds looming, market participants will demand significantly higher yields. Bessant needs the RV Fund to step up, use maximum leverage, and buy into the bond market in large quantities. Therefore, buybacks are necessary.

The positive impact of repo on USD liquidity is not as direct as the printing of money by the central bank. Repo is budget and supply neutral, which is why the Treasury can do unlimited amounts of repo to create the huge purchasing power of the RV Fund. Ultimately, this allows the government to finance itself at affordable rates. The more debt is issued, bought not with private savings but through leveraged funds created by the banking system, the greater the growth in the quantity of money. Then we know that when the amount of fiat money rises, the only asset we want to hold is Bitcoin.

Obviously, this is not an unlimited source of USD liquidity. There is a finite amount of off-market bonds that exist. However, repo is a tool that allows Besant to mitigate market volatility in the short term and finance the government at an affordable level. This is why the MOVE index has fallen. And as the Treasury market stabilizes, the fear of a total system collapse has decreased.

layout

I liken this trade layout to a layout for the third quarter of 2022. In the third quarter of 2022, right white boy Sam Bankman-Fried (SBF) is broke; the Fed is still raising rates, bond prices are falling, and yields are rising. Bad girl Yellen needs a way to stimulate the market so that she can pry open the market's throat with her red-soled high heels and dump bonds without inducing a gag reflex. In short, as it is now - with market volatility rising due to a shift in the global monetary system - it is a bad time to increase bond issuance.

Reverse repo balance (white) and Bitcoin (gold)

Just like today, but for different reasons, Yellen can’t count on the Fed to ease because Powell is on a Paul Volcker-inspired sideshow moderation tour. Yellen, or some cunningly clever employee, correctly deduced that the sterile money in the reverse repos held by money market funds could be coaxed into the leveraged financial system by issuing more Treasuries, which the funds are happy to own because they yield slightly more than the reverse repos. This allowed her to add $2.5 trillion in liquidity to the market from the third quarter of 2022 to early 2025. During that time, Bitcoin rose nearly 6 times.

This is a fairly bullish setup, but people are scared. They know that high tariffs and the US-China trade war are bad for stock prices. They think Bitcoin is just a high-beta version of the Nasdaq 100. They are bearish and don’t understand how a harmless-sounding buyback program can lead to increased dollar liquidity in the future. They sit on the sidelines, waiting for Powell to ease. He can’t directly ease or provide quantitative easing in the way that previous Fed chairs did between 2008 and 2019. Times have changed, and now the Treasury is responsible for printing a lot of money. If Powell truly cared about inflation and the long-term strength of the dollar, he would offset the impact of the Treasury actions of Yellen and now Bessant. But he didn’t then, and he won’t now; he will sit in the chair of the dictated, and be dictated.

Just like in Q3 2022, people thought Bitcoin could fall below $10k as market headwinds converged after the cycle low of $15k. Today, some think we will fall below $74,500, to below $60k, and the bull run is over. Yellen and Bessant are no joke. They will ensure that the government is funded at affordable rates and bond market volatility is suppressed. Yellen issued more notes than bonds to inject limited reverse repo liquidity into the system; Bessant will maximize the RV fund's ability to absorb the increased bond supply by issuing new bonds to buy old ones. Neither is quantitative easing as most investors know and recognize. Therefore, they missed the opportunity and had to chase higher once the breakout was confirmed.

verify

For buybacks to have a net stimulatory effect, the deficit must continue to rise. On May 1, through the Treasury's Quarterly Refinancing Announcement (QRA), we will know the upcoming borrowing plans and how they compare to previous estimates. If Bessant must or is expected to borrow more, it means that tax revenues are expected to fall; therefore, the deficit widens with no change in spending.

Then, in mid-May, we will get the official April deficit or surplus from the Treasury with actual tax revenue data for April 15. We can compare the year-over-year changes so far in fiscal 2025 to see if the deficit is widening. If the deficit is rising, bond issuance will increase, and Bessant must do what he can to ensure that the RV Fund can increase its basis trade position.

Trading strategies

Trump ski-cut a dangerously steep slope, triggering an avalanche. We now know the level of pain or volatility (MOVE index) that the Trump administration can tolerate, before implementing policies that the market believes will negatively impact the fundamentals of the fiat financial system. This triggers a policy response whose impact will be to increase the supply of fiat dollars that can purchase Treasuries.

If increasing the frequency and size of repo is not enough to calm the markets, the Fed will eventually find ways to ease. They have already said they will. Most importantly, they reduced the pace of quantitative tightening (QT) at their recent March meeting, which is a positive for USD liquidity in the long run. However, the Fed could also do more, beyond QE. Here is a list of procedural policies that are not QE but increase the market’s ability to absorb increased Treasury issuance; one of which could be announced at the May 6-7 Fed meeting:

Exemption of Treasuries from the supplementary leverage ratio (SLR) for banks. This allows banks to use unlimited leverage to buy Treasuries.

Conduct a quantitative tightening distortion, reinvesting cash raised from maturing mortgage-backed securities (MBS) in newly issued Treasury securities. The size of the Fed's balance sheet remains unchanged, but this will add marginal buying pressure to the Treasury market by $35 billion per month, for many years, until the total stock of MBS matures.

The next time Trump presses the tariff button — which he will do to ensure that countries respect his authority — he will be able to demand additional concessions, and Bitcoin will not be crushed along with certain stocks. Bitcoin knows that deflationary policies cannot be sustained in the long term given the insane levels of current and future debt required to run the dirty financial system.

The ski cut on Sharp World Mountain set off a secondary financial market avalanche that could quickly escalate to a Category Five. But Team Trump responded by changing course, putting the Empire on a different footing. The slope’s foundations solidified on dry powder snow made from glistening dollar bills provided by Treasury buybacks. It was time to move from slogging up the mountain with a backpack full of uncertainty to jumping off pillows of powder snow, cheering how high Bitcoin would rise.

As you can see, I am very bullish. At Maelstrom, we have already maximized our crypto exposure. Now it is all about buying and selling different cryptocurrencies to accumulate satoshis. The coin with the most purchases during the drop from $110,000 to $74,500 was Bitcoin. Bitcoin will continue to lead the way as it is the direct beneficiary of future monetary liquidity injections that are intended to soften the impact of US-China trade. Now that the global community believes that Trump is a lunatic who wields the weapon of tariffs in a crude and brutal manner, any investor holding US stocks and bonds is looking for value in anti-establishment. Physically, that's gold. Digitally, that's Bitcoin.

Gold was never considered a high-beta version of US tech stocks; therefore, it performed well as the oldest anti-establishment financial hedge as the market generally crashed. Bitcoin will break away from its correlation with tech stocks and rejoin gold's "up-only" embrace pool.

What about Altcoin?

Once Bitcoin breaks past its previous high of $110,000, it could surge higher, further increasing its dominance. Maybe it’s just a little short of $200,000. Then the rotation from Bitcoin to Altcoin begins.

Aside from the shiny new Altcoin meta-trend, the best performing tokens will be those that are tied to projects that both earn profits and return profits to staked token holders. There are only a handful of such projects. Maelstrom has been diligently accumulating positions in certain eligible tokens and is not done buying up these gems yet. They are gems because they have been hammered along with other Altcoin in the recent sell-off, but unlike 99% of alt projects, these gems actually have paying customers. Due to the sheer volume of tokens, it is difficult to convince the market to give your project another chance after launching a token on a centralized exchange (CEX) in a “drop-only” mode. Altcoin lurkers want higher staking APYs, and these returns come from actual profits because these cash flows are sustainable.

Link to this article: https://www.hellobtc.com/kp/du/04/5756.html

Source: https://mp.weixin.qq.com/s/x3c9a9L7sl-ViFeKtqoUPQ