Bitcoin loses $2 trillion liquidity safety net! Federal Reserve reverse repurchase agreement zero alert

The Federal Reserve’s reverse repurchase mechanism has decreased from over $2 trillion to nearly zero, eliminating the liquidity safety net that Bitcoin was hiding behind. Although global liquidity reached a new high of $187.3 trillion, it has fallen back by $1.8 trillion since November. US net liquidity flattened in Q4, and Bitcoin’s mechanical boost has faded; its trajectory in 2026 will depend on rate cuts, the dollar, and Chinese policies.

Chain reaction of the disappearance of the $2 trillion reverse repo buffer

(Source: Bank for International Settlements)

The Federal Reserve’s overnight reverse repurchase facility (RRP) held over $2 trillion in 2022, serving as a safe haven for cash parked by money market funds. When these funds withdraw from RRP and shift into other assets, they effectively inject liquidity into the market. This process created a significant mechanical boost in 2024 to early 2025, acting as an invisible driver behind Bitcoin’s rise.

But this $2 trillion “savings jar” is now empty. The Fed’s report shows that RRP balances have fallen to near zero for the first time in years. This means the additional liquidity sources that supported the market over the past 18 months have dried up. From here, changes in reserves are mainly driven by Treasury issuance and Fed operations, rather than draining a large buffer.

More critically, after the reverse repo buffer disappears, further funding pressures directly impact bank reserves. The Fed’s standing repo operations occasionally surge, indicating the system is seeking alternative liquidity sources. This also explains why the Fed has recently effectively ended quantitative tightening and resumed small-scale purchases of short-term government bonds to ease reserve pressures.

Data from the Bank for International Settlements (BIS) shows that cross-border bank credit in foreign currencies reached a record $34.7 trillion in Q1 2025, with USD, euro, and yen credit growing 5% to 10% annually. As of June, USD-denominated foreign currency credit increased 6% annually, and euro credit grew 13%. These figures support the narrative of “global liquidity hitting new highs.”

However, high-frequency tracking of cross-border capital reveals a different picture. Michael Howell’s October report notes that global liquidity, at about $185 trillion, has reached a historic high but struggles to continue climbing. Data from December 5 shows $187.3 trillion, up $750 billion from the previous week but still slightly below early November peaks. By December 23, liquidity declined again by $592 billion to $186.2 trillion, and Howell states that since early November, it has fallen by about $1.8 trillion.

Tightening of the US net liquidity formula

(Source: Trading View)

The “net liquidity” formula tracked by crypto traders is: Federal Reserve assets - Treasury General Account (TGA) - reverse repurchase. This formula reveals the true state of domestic liquidity in the US, and the changes in Q4 are entirely unfavorable.

Triple tightening factors of net liquidity

1. Reduction of the Federal Reserve’s balance sheet

· Total assets decreased by about $132 billion over the past two quarters to $6.6 trillion as of September

· Securities holdings decreased by $126 billion

· Quantitative tightening continues to drain market liquidity

2. Expansion of the Treasury General Account (TGA)

· Since the debt ceiling resolution mid-year, TGA increased by about $440 billion

· Government hoarding cash effectively withdraws liquidity from the market

· Reserve balances decreased by about $450 billion

3. Reverse repo buffer has gone to zero

· Dropped from over $2 trillion in 2022 to near zero

· Eliminated a major automatic stabilizer

· Future pressures will directly impact bank reserves

The Fed’s balance sheet report confirms that, as of September, total assets decreased by about $132 billion to $6.6 trillion, with securities holdings down $126 billion. Meanwhile, the Treasury General Account increased by about $440 billion since the debt ceiling deal mid-year. This, combined with quantitative tightening, has reduced reserve balances by approximately $450 billion.

The combined effect of these three tightening factors is that US net liquidity in Q4 was flat or slightly negative. While global liquidity remains at record highs, the US domestic liquidity engine that has driven Bitcoin higher has stalled. The water level remains high, but the wind has shifted from strong tailwinds to mixed or even slight headwinds.

This divergence is crucial because Bitcoin’s price is far more sensitive to the speed of liquidity changes than to absolute levels. High-level platforms can support prices but cannot trigger explosive growth. To break through, the market needs acceleration, not stagnation. The vigorous growth momentum seen in 2024 to early 2025 is unlikely to recur.

Four key variables influencing Bitcoin’s trajectory in 2026

The Fed has effectively stopped shrinking its balance sheet and resumed small-scale Treasury purchases, removing the ongoing drain on reserves. This alleviates US net liquidity tightening but also means Bitcoin has lost the mechanical boost from reverse repos. From now on, market movements will fluctuate at high levels: global liquidity remains high but may slowly decline or accelerate again depending on policy choices and the dollar’s trend.

The first variable is the Fed’s rate cut path. If the Fed cuts rates in a moderate inflation environment without a clear credit crisis, risk assets are generally supported, and the yield curve may steepen again, benefiting shadow banking and collateral chains. But if rate cuts are prompted by issues in certain sectors, liquidity injections could add to risk aversion, making the situation more chaotic. Currently, options markets and forward contracts expect rate cuts but without signs of panic; the policy tone remains mildly accommodative rather than emergency quantitative easing.

The second variable is the dollar’s trend. A roughly 10% decline in the USD Index (DXY) in 2025 typically increases global dollar liquidity. However, Howell points out that the recent rebound of the dollar from absolute lows is one of the factors pressuring global liquidity momentum in November and December. If this short-term correction turns into a new uptrend, it will tighten markets and suggest that the liquidity peak has passed. A continued softening of the dollar equates to global easing policies, relaxing restrictions on non-US borrowers’ dollar debt.

The third variable is Treasury issuance and TGA balances. If the Treasury issues more short-term T-bills and allows TGA balances to decline, funds are effectively re-injected into money markets and bank reserves, slightly increasing liquidity. Conversely, large issuance of long-term bonds and higher TGA balances have the opposite effect. Recent quarters’ refinancing efforts aim to keep markets friendly, but funding needs or political changes could alter this.

The fourth variable is the policies of the People’s Bank of China and emerging market central banks. If Beijing intensifies stimulus—such as credit quotas, local government support, or lowering reserve requirement ratios—this will be another pathway for global liquidity support. If cautious, the US economic cycle’s top will face fewer counteracting forces. China’s reserve growth, forex interventions, and credit easing quietly influence global liquidity significantly.