Connecting the Dots

Episode 144 - Passing the Liquidity Nadir

Welcome to the new subscribers that have joined us in the last week. The aim of this newsletter is to help you navigate the world of crypto. There’s an incredible amount of information out there so we try to distil it into the things you MUST know each week, covering both macro and crypto.

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Onto the newsletter. Here’s what you’re getting this week:

Macro Update: Our latest view on the macro and its impact on crypto markets.
Crypto Native News: Coinbase released its Q3 earnings, Tether releases Q3 attestation.
Institutional Corner: Australia’s financial regulator updates digital asset’s laws, Western Union to launch a stablecoin, IBM launching a digital assets platform, Indonesia’s central bank is moving ahead with plans a digital currency backed by government bonds.
Charts of the Week: Stablecoin use for payments jumps 70% since US regulation, retail still the biggest investors in bitcoin.
Top Jobs in Crypto: Featuring Fidelity, Wise, Fireblocks, Marex, Binace and Kraken.

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Macro Update

This is where we connect the dots between macro and crypto.

Passing the Liquidity Nadir

A choppy week for markets that began in bullish mood on positive US/China trade developments, only to be soured by a more “hawkish” Fed. Despite cutting 25bps as expected, Powell cast doubt on a December cut, whilst month-end liquidity pressures exposed the funding stress we’ve been flagging. Bitcoin, meanwhile, closed its first red October since 2018.

Let’s unpack what’s been going on and figure out where we’re headed 👇

Firstly on US/China negotiations. We always like to fade the “risk-off” associated with the aggressive headlines and lean into the memetic TACO trade (Trump Always Chickens Out!). Both China and the US, as the world’s two largest economies, are mutually dependent on one another, rendering the threats that both sides make as somewhat insincere and certainly unsustainable.

Indeed, as expected, the leaders agreed to a one year trade truce with a reduction of US tariffs on Chinese imports and a suspension of China’s controversial export controls on rare earth metals. China will also resume purchases of US soybeans and other agricultural products. Both Trump and Xi exchanged the usual platitudes to suggest for now, they’re all friends and we can breathe easy on trade wars for a while. President Xi perhaps with the more significant remarks in saying “China’s development and rejuvenation are not incompatible with President Trump’s goal of Making America Great Again” - this speaks to our assertion that both China and the US are mutually dependent on one another and will need to find compromise ✅

“Not a Forgone Conclusion”

The other big event of the week was Wednesday’s FOMC meeting where the Fed cut rates 25bps as was largely expected and fully priced by markets. Perhaps less expected, but in line with our call last week, the Fed also announced an end to Quantitative Tightening (QT) from the 1st Dec. That is, after November, the Fed’s balance sheet will no longer be contracting by allowing maturing Treasury holdings to run off.

That marks a major turning point — the end of QT, and the beginning of balance sheet expansion once more.

However, in a “hawkish twist”, governor JPow poured cold water on a December rate cut by explicitly emphasising that it is “not a foregone conclusion”. With the delicate balance of weighing the uncertainty and downside risks to the labour market against the upside risks to inflation and with the government shut down limiting the information the Fed will have at its disposal, there is caution at the Fed to pursue another rate cut. Instead, it sounds like they will take a more cautious, wait and see approach, given the recent cuts they’ve already made and as they wait to receive more data.

On balance, we place little importance on the timing of Fed rate cuts and what’s more important outside of short term market fluctuations, is the direction of travel and that currently remains for lower rates and an easier liquidity environment. Further, in an age of fiscal dominance, the Fed and rate policy is not the game in town anymore. We remain very much in a bull market which we expect to run at least into the midterms next year, with global fiscal pumping, liquidity rising and global rates easing. Nonetheless, the more hawkish Fed tone saw US yields and the dollar pop higher, weighing on equities into the end of the week. “Big tech” however, still drove positive returns for the major indices, despite mixed earnings from MAG7 as Artificial Intelligence spending continues unabated. This saw NVIDIA become the first company to reach a market cap of $5 trillion 🤯

Whilst many participants continue to call for a bubble in all things tech and AI, we think the “mean reversion” mindset of many investors continues to struggle with the concept of an exponential, secular trend. From an equity stand point, tech and AI is the TINA trade (there is no alternative) and as AI replaces not just parts of the labour force, but entire businesses and industries, we expect a large percentage of equity market value transfers to AI related equities. The equity trade for the next decade is really simple. Buy Nasdaq, wear diamonds 💍

Liquidity, liquidity, liquidity….

The story that continues to dominate and weigh on crypto markets however, remains liquidity. Whilst global liquidity in aggregate is rising, tightening liquidity and underlying signs of stress in the US funding markets we believe are negatively weighing on the hyper-liquidity-sensitive digital asset space.

Take a look at the Treasury General Account (TGA) which is the US Treasury’s cash account held at the Fed 👇

This rose to $1 trillion as of 30th October which is a rise of circa $200bn throughout October. With the government shutdown, the cash in the TGA can’t be spent to fund government operations, yet it builds as receipts are received and debt continues to be issued.

That’s cash coming directly out of the market and a drain on US bank reserves. On top of this, with month end, banks “window dressing” balance sheets reduce riskier lending and park that money at the Fed’s Reverse Repo Facility (RRP) in order to reduce capital charges they pay when the month end snapshot of their balance sheet is taken. In the past week, the RRP rose circa $50bn, again cash being taken directly out of the market.

Adding to all of this, as we wrote last week, bank reserves have fallen to the lower end of “ample” - this is precisely why the Fed announced the end of QT as of 1st Dec because QT is a further drain of bank reserves and liquidity in the market. After the money printing of QE, bank reserves exploded higher and a lot of that excess cash sat in the RRP reaching at one stage, over $2.5trn. As QT started, the RRP started to be drawn down, funding the deficit and injecting a lot of cash into markets. This has been a key driver of the bull market in equities and Bitcoin over the past 3 years. However, the RRP hit zero a few weeks ago and excess bank reserves were required to fill the liquidity gap and those reserves are now running a little dry.

Consequently, we’ve started to see signs of tightness in bank funding markets, witnessed by elevated SOFR spreads and rising usage of the Fed’s Standing Repo Facility (SRF)

NB ✍️ The SRF was launched in 2021 and allows eligible counterparties to borrow directly from the Fed, using high quality collateral such as treasuries. The facility is more expensive than market repo rates (and is designed to keep a lid on those rates in times of stress) hence when market participants tap the SRF, it suggests they’re struggling to borrow from the market.

On Friday, the SRF was tapped by eligible counterparties for a record $50bn. Clearly, signs of liquidity tightening in the US banking system and all of this has been weighing on Bitcoin, alongside the fact that we’re digesting a lot of whale supply. Equities we believe have remained supported by the fact that since April, the market has been underweight and is forced to “gross up” exposure and buy every equity dip as they chase performance.

Where do we go from here?

This past week, we believe we’ve seen the “peak” in US liquidity conditions tightening, which we see marking a local bottom for Bitcoin and crypto.

With month end past, the circa $50bn that moved into the RRP will come back into the market. Bank reserves will also be more freely leant out, alleviating some of that money market stress. Following that, when the government shutdown ends, which is expected to be mid November, the TGA will start to be drawn down as the money is spent to fund operations once more, unleashing a wave of cash back into the market. That will consequently see bank reserve levels rise, further alleviating funding stress. So the liquidity picture is set to change quite significantly over the coming weeks which will see Bitcoin re-connect to the broader risk picture and we believe re-test record highs 🌊

The end of QT in December will also end the Fed driven liquidity drain via balance sheet contraction. From there, we will actually see the Fed balance sheet naturally start to rise once more as it grows in line with the economy and demand for currency in circulation (currency is a Fed liability so as the economy grows, the demand for currency grows and to match that liability, the Fed’s assets simultaneously grow)

Now we are still of the view that, given the size of the deficit, the Fed will need to accelerate the pace of balance sheet expansion, providing liquidity via short term monetary operations which effectively will be a form of money printing and QE. Or as we like to say “Not QE QE” - macro doomers and the sell side suits will write endlessly about why this is not QE - which technically it isn’t. Yet it is still money printing to fund the deficit and will have the same impact in terms of debasing the value of currency and pushing investors further out on the risk curve.

That’s a story likely for next year and we expect we will have another “liquidity wobble” as funding conditions tighten to a point where the Fed is forced to respond more aggressively.

In the shorter term, as month end passes and particularly with the end of the government shutdown, when that occurs, alongside the end of QT, we believe liquidity conditions will ease allowing Bitcoin to break out of these recent ranges and re-test the record highs.

Longer term of course, all of this reinforces our thesis that the fiat, debt based financial system can only survive on ever more liquidity and money printing, defaulting by the stealth debasement of the currency. As each time the Fed are forced into their role as liquidity provider of last resort, it comes at higher levels of debt, higher levels of Fed balance sheet and so a faster pace of monetary debasement which will continue to drive Bitcoin and other hard assets ever higher. We’re starting to see those debasement games again play out real time. Position accordingly.

Native News

Key news from the crypto native space this week.

Coinbase released its earnings for Q3 this week. The company reported $1.5 in earnings per share (EPS) for Q3 as compared to Wall Street analyst expectations of only $1.05, beating estimates by 45%. Coinbase earned a quarterly revenue of $1.86 billion, up 25% Q/Q, higher than the estimated $1.8 billion. The quarterly revenue included a transaction revenue of $1 billion and a subscription and services revenue of $747 million. It also earned $355 million in stablecoin revenue during Q3. During Q3, Coinbase’s global spot crypto trading volumes were up 38% Q/Q, and U.S. spot crypto volumes were up 29% Q/Q. The crypto exchange reported a net income of $433 million during Q3, with adjusted EBITDA of $801 million. The company held total assets worth more than $31 billion and total liabilities worth more than $15 billion as of Sep. 30, 2025. Following Coinbase’s acquisition of Deribit, the two exchanges collectively achieved over $840 billion of notional derivatives trading volume in Q3. Coinbase also grew its Bitcoin (BTC) holdings for its crypto investment portfolio by $299 million in Q3. Read the full shareholder letter HERE.

Tether released its Q3 attestation on Friday and the stablecoin issuer reported that it has generated profits of over $10 billion during the first three quarters of this year. Given that Tether said in July it had posted $5.7 billion in profit through two quarters, it appears the company’s third-quarter profits surpassed at least $4.3 billion. As a private company, Tether does not publish standard quarterly earnings reports, but instead attestations prepared by BDO. Tether said its total exposure to U.S. Treasuries reached $135 billion. The company also holds nearly $13 billion in precious metals and $10 billion in Bitcoin. Read the full attestation HERE.

Institutional Corner

Top stories from the big institutions

Australia’s financial regulator this week released an updated version of its guidance clarifying how the country’s existing financial services laws apply to digital assets. The Australian Securities and Investments Commission (ASIC) said in a statement on Wednesday that it now considers products such as stablecoins, wrapped tokens, tokenised securities and digital asset wallets as financial products. Companies therefore need a local financial services license to offer such products. ASIC Commissioner Alan Kirkland said “Many widely traded digital assets are financial products under current law — and will remain so under the Government’s proposed law reform — meaning many providers require a financial services license. Licensing ensures consumers receive the full suite of protections under the law and allows ASIC to act when poor practices lead to harm.” Read the full statement from ASIC HERE.

Western Union this week announced that it has plans to launch a U.S. Dollar Payment Token, or USDPT for short. The stablecoin will be built on the Solana blockchain and issued by Anchorage Digital Bank. The digital token is expected to launch in the first half of 2026, and customers will be able to access it through Western Union’s partner exchanges. As a fun fact, Western Union built the first transcontinental telegraph line in 1861. Devin McGranahan, president and chief executive of Western Union said “We are a long way from the telegraph, but the idea of connecting people and using technology to do it is deeply in our roots for 175 years. Moving into digital assets and stablecoins is just the next chapter in that long journey of connecting people through technology.”

International Business Machines Corp, or IBM as you probably know it, is launching a digital assets platform to allow financial institutions, governments and companies to launch blockchain-based services. The new offering, called Digital Asset Haven, was built together with crypto wallet technology provider Dfns, the companies said in a statement on Monday. IBM and Dfns are seeking to take advantage of a rising appetite among clients for creating and managing digital-asset services ranging from custody to settlement. Tina Tarquinio, chief product officer for the IBM Z and LinuxONE businesses said “The alternative is they [companies] build it all themselves or they take piece parts and build it all themselves. This is a pretty significant bundle that would really jump-start what they’re doing.”

Bank Indonesia, Indonesia’s central bank, is moving ahead with plans to issue what it describes as its “national stablecoin version,” a digital currency backed by government bonds. The initiative was unveiled by central bank Governor Perry Warjiyo during the Indonesia Digital Finance and Economy Festival and Fintech Summit 2025 in Jakarta on Thursday. Warjiyo said Bank Indonesia plans to issue digital central bank securities, which are tokenized versions of government bonds (SBN’s). The digital securities will be backed by the digital rupiah, the country’s central bank digital currency (CBDC). The banks planned digital securities will be derived from the digital rupiah and backed by government bonds (SBN), forming what the central bank calls Indonesia’s national version of a stablecoin.

Charts of the Week

Because charts are just as important as macro.

1. Stablecoin use for payments jumps 70% since US regulation.

2. According to Bitwise, the percentage of retail investors in Bitcoin is still approximately 66%, which indicates that the vast majority of Bitcoins remain under the control of non-institutional investors.

Top Jobs in Crypto

Well, we all want to work in Crypto don’t we. Here’s a bit of help on your job search!

Principle DeFi Quant Developer at Fidelity Investments

Product Lead Digital Assets at Wise

Product Marketing Director at Fireblocks

Crypto Trader at Marex

MLRO UK at Binance

Staff Product Manager - Pro - Exchange at Kraken

DISCLAIMER: The content in this newsletter is not financial advice. This newsletter is strictly educational and is not investment advice or a recommendation to buy or sell any assets or to make any financial decisions. Crypto markets are volatile, please be careful and do your own research.