Dollar Drought, Not Political Drizzle, Drives the Sell-Off
Bitcoin’s sudden descent from its early-October peak has rattled traders still basking in the post-halving glow, yet BitMEX co-founder Arthur Hayes argues the move is little more than a real-time weather report on U.S. dollar liquidity.
In his latest market essay—themed around the unpredictable powder days of Hokkaido—Hayes likens the world’s largest cryptocurrency to a mountainside windsock: when cheap dollars blow freely, prices lift; when liquidity tightens, the asset slumps, regardless of what politicians say in Washington.
His proprietary USD Liquidity Index, a composite of Treasury General Account balances, reverse-repo usage and foreign central-bank swap lines, has declined roughly ten percent since April. Bitcoin initially ignored the contraction, climbing twelve percent alongside upbeat fiscal rhetoric, but the disconnect finally snapped as funding costs spiked and overnight repo volumes shrank. The result: a 25 % drawdown that took the market from “up only” memes to forced-liquidation reality in barely six weeks.
ETF Basis Traders and Digital-Asset Treasuries Pulled the Rug
Hayes contends the sell-off might have arrived sooner were it not for a wave of seemingly healthy inflows into newly approved spot Bitcoin exchange-traded funds. Much of that capital, however, came from hedge funds running basis arbitrage—long spot ETF shares, short CME futures—to lock in annualized yields that briefly topped twenty percent.
As Treasury bill rates rose and the futures-spot spread collapsed below two percent, the arbitrage became uneconomical. Funds unwound positions, creating a mechanical outflow that masked, then magnified, the underlying liquidity crunch. Simultaneously, Digital-Asset Treasury companies—public firms that issue shares backed by Bitcoin—saw their premiums flip to discounts, stifling their once-aggressive accumulation programs.
With both sources of bid pressure sidelined, Bitcoin’s “winter storm” gathered speed, taking out leveraged longs and pushing the Crypto Fear Index to its lowest level since July 2022 in a single, cascading week.
Election-Year Stimulus: The Unwritten Call Option
Looking forward, Hayes frames the next phase as a political stress test for dollar creation. He expects fiscal hawkishness to dominate official speeches into early 2026, yet predicts that market turbulence—and the looming midterm calendar—will force lawmakers to reopen the monetary taps.
In his view, the current pullback is a “short-term lull in fiat birth,” not the beginning of a lasting bear market. Should Treasury issuance rebound and reverse-repo balances drain, he believes Bitcoin will reprice higher well before headline economic data confirms a policy pivot. Until then, he warns, traders must respect the weather: fresh liquidity snow has not yet fallen, and thin powder makes for treacherous slopes.
