Observers say the crypto market is bracing for a recession as liquidity tightening continues after the US debt ceiling was lifted.

The addition of a joint account by the U.S. Treasury and the Federal Reserve (Fed) to shrink its balance sheet will remove hundreds of billions of dollars from the financial system, weighing on prices  in the coming months.

The freeze in liquidity conditions earlier this year helped lift prices of risk assets, including stocks and digital assets. Market-wide surges in crypto assets pushed bitcoin (BTC), the largest cryptocurrency by market capitalization, to $31,000 before spiraling into a speculative frenzy in meme coins, reminiscent of the sugar rush near the top of the bull market.

However, this trend will change when US lawmakers approve increased ability of the government to issue new debt, putting pressure on risky investments.

First, the US Treasury will have to refill the almost completely depleted Treasury General Account (TGA), which means replenishing about $500 billion in cash from the financial system.

“This could particularly affect risk assets as they tend to be more sensitive to liquidity conditions than safer assets such as bonds,” said macro analyst Noelle Acheson. and many stock groups".

“The Treasury Department drawing down its account at the Fed was one of the market headwinds earlier this year, as money that would normally just sit there was injected into the economy in the form of spending,” Acheson explained. government".

“Now, the opposite could happen: the government needs to replenish that account balance by issuing debt that would draw liquidity out of the market and back into Treasury accounts.”

The deposit into the general account coincides with the Fed continuing its quantitative tightening campaign, briefly interrupted in March by the regional banking crisis, to reduce its balance sheet bloat. accounting from supporting the economy during the pandemic.

Macro analyst Lyn Alden called this a “double whammy for liquidity” in a market report.

“The appeal of many large liquidity-based stocks will fade over the next few months unless or until we get more clarity on liquidity conditions going forward,” Alden said. “This is an environment where investors should know what they are getting into, be prepared for volatility and avoid excessive leverage.”

According to Tom Dunleavy, founder of Dunleavy Investment Research, the debt ceiling settlement bill - if passed in its current form - would also contribute to a negative impact on liquidity.

He explained in a tweet that several key points of the agreement such as limiting non-defense funding, reclaiming unused pandemic relief funds, and resuming student loan payments will limit the amount The remainder is for consumers to invest. “Liquidity will be very negative,” Dunleavy added.

3/4 Implications: Liquidity will be very negative. We have to deposit about $500 billion into the TGA, which means issuing bnds. With mkts buying bnds, it means reducing investment in risky assets. Rollbacks on Covid19 fund + student loan pmts restart, also means consumers hold fewer dollars pic.twitter.com/ohHJiF7W6O

— Tom Dunleavy (@dunleavy89) May 28, 2023

The US House of Representatives is poised to vote on raising the debt ceiling on Wednesday night.

Corporate trading platform, FalconX, said tightening liquidity conditions, reduced likelihood of a Fed rate cut this year and the current trading environment of reduced volatility and volume kept the market Crypto is ready to receive a shock.

David Lawant, head of research at FalconX commented: “This macro scenario (…) leads me to believe that we may be in a dangerous calm before the storm in the crypto market.