Bitcoin's Bullish Seasonality Muddled by Continued Slide in 'USD Liquidity Index'

Bitcoin has put in a positive performance in October in eight out of the past 12 years. However, the bullish seasonality may not play out this year, thanks to the declining USD liquidity.

AccessTimeIconSep 30, 2022 at 8:47 a.m. UTC
Updated May 11, 2023 at 4:39 p.m. UTC

October has been a good month for bitcoin (BTC) and traders may be looking forward to capitalizing on the bullish seasonality, having seen the cryptocurrency hold steady through recent traditional market turmoil.

Bitcoin has put in a positive performance in October in eight out of the past 12 years, with an average return of around 30%, according to historical data sourced from charting platform TradingView. In other words, October has generated positive returns 66% of the time.

However, one indicator tracking the U.S. dollar liquidity calls for caution on the part of the bulls.

The so-called USD Liquidity Condition Index has slipped to a 19-month low of $5.7 trillion, according to chart provided by TradingView.

"The Fed net [dollar] liquidity is falling off a cliff, a clear headwind for crypto asset prices," Lewis Harland, a researcher at Decentral Park Capital, said in a daily market update.

The index assesses the degree of dollar liquidity based on the interaction of three factors – the size of the Federal Reserve's balance sheet, the Treasury General Account (TGA) and the reverse repo balance held at the New York Fed.

The liquidity declines when the Fed's balance sheet contracts, the TGA and repo balances rise. On the contrary, an expansion of the Fed's balance sheet and a decline in the TGA and repo balances indicates an uptick in the dollar liquidity.

The Fed kicked off its tightening cycle in March early this year and has raised borrowing costs by 300 basis points since then. The central bank is likely to hike further, taking the benchmark interest rate to 4.7% in the coming months. Further, the bank is reducing its balance sheet size at a monthly pace of $90 billion.

Since 2021, major bitcoin price tops and bottoms have coincided with local peaks and troughs in the dollar liquidity index, as Arthur Hayes, co-founder and former CEO of crypto spot and derivatives exchange BitMEX, detailed in the Aug. 23 blog post while calling bitcoin, "a high powered measure of USD liquidity."

Chart shows local USD liquidity tops and bottoms from 2021 have coincided with major bitcoin price tops and bottoms. (TradingView)
Chart shows local USD liquidity tops and bottoms from 2021 have coincided with major bitcoin price tops and bottoms. (TradingView)

With the dollar liquidity index slipping to a new year-to-date low, the odds appear stacked against bitcoin chalking out gains in the seasonally bullish month of October.

"It may be a final straw that broke the camel's back," Harland wrote, referring to a possibility of a final capitulation slide in bitcoin in the wake of a continued tightening of the dollar liquidity.

Bitcoin changed hands at $19,630 at press time. Since Sept. 21, buyers and sellers have been unwilling to lead the price action, leaving the cryptocurrency rangebound between $18,000 and $20,000.


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Omkar Godbole

Omkar Godbole is a Co-Managing Editor on CoinDesk's Markets team.