Has the big move for Bitcoin arrived?

Recently, the volatility in the cryptocurrency market has focused investors' attention on Bitcoin (BTC). The Federal Reserve's (Fed) recent drop in bank reserves to their lowest level in some time is seen by analysts as a precursor to a significant move for Bitcoin.

The Kobeissi Letter, known for its macro analyses, reported that cash reserves at the Fed have fallen to $2.93 trillion. Bitcoin writer Adam Livingston notes that this data signifies an important turning point in the crypto market. In a October 25 post by The Kobeissi Letter, it is emphasized that the cash reserves held by banks at the Fed have significantly decreased in recent months. This situation is linked to the reduction in what are known as "reserve balances," which represent the deposits held by the banking system at the central bank. A decline in cash reserves indicates a contraction in dollar liquidity and an increase in the sensitivity of short-term funding conditions.

Livingston describes this scenario as a "danger threshold." According to him, when cash reserves fall below a certain level, the Fed is compelled to take action to alleviate market tightness, and this usually marks the beginning of strong upward periods for Bitcoin.

The analyst believes that the decrease in cash in the system is the result of a combination of several factors. The U.S. Treasury's issuance of more bonds to replenish its cash account at the Fed is causing a reduction in private cash in the market. Additionally, the Fed's quantitative tightening (QT) process is shrinking its bond portfolio, further decreasing the amount of money entering the system. The increasing amount of money in circulation each year is also narrowing the space allocated for banks on the Fed's balance sheet, further tightening reserves.

Could history repeat itself for Bitcoin? Livingston recalls that the past responses of the Fed to similar liquidity crunches have supported Bitcoin's price. He emphasizes that Bitcoin experienced sharp increases following the 2019 repo crisis, the 2020 pandemic-era easing, and the 2023 regional bank crisis. The continuous demand for spot Bitcoin ETFs is leading to a reduction in the amount of Bitcoin available for trading in the market, suggesting that when liquidity expands, the increases could be sharper.