Arthur Hayes, the co-founder and former CEO of BitMEX who now manages a family office named Maelstrom, outlined three key macroeconomic variables that could cause a “vicious washout of all the crypto tourists” in March.

The colliding variables relate to the Federal Reserve’s Reverse Repo Program, Bank Term Funding Program and March's interest-rate decision, Hayes wrote in a blog post on Thursday.

The RRP is a central bank tool to help manage short-term liquidity — using securities, like government bonds, as collateral, enabling financial institutions to earn returns on cash reserves. The BTFP enables central banks to provide longer-term loans to commercial banks, using similar high-quality assets as collateral, aiding banking sector stability.

Hayes argues that liquidity has been pumped into the financial markets via a decline in the RRP balance, which he expects to bottom out by early March based on the rate of decline in 2023. Another source of dollar liquidity is then required to “keep the party going,” he said. “Without any other new sources of dollar liquidity, bonds, stocks, and I believe crypto will also get the stick. I loaded up on crypto in the second half of 2023, and I believe now until April is a no-trade zone in terms of the addition of risk.”

Another risk comes from the BTFP, set to expire on March 12. Hayes suggested that U.S. Treasury Secretary Janet Yellen might initially resist renewing the program, potentially leading to financial instability from a further reduction in liquidity. This decision could trigger a chain reaction, affecting the banking sector and the broader financial markets, including crypto assets.

However, if this leads to the failure of a few sufficiently large banks, similar to the collapses seen in March last year, Hayes argues Yellen will be forced to renew the program. “The combination of a lack of liquidity gushing from the RRP and the lack of printed money to cover the bond losses on banks’ balance sheets will decimate the financial markets globally,” he said. “This is a correlation one moment. All assets, including crypto, will fall together as the market hyperventilates at the prospect of the free market working once more and cleansing the system of insolvent banking institutions.”

The Federal Reserve's meeting on March 20 also looms large in Hayes' analysis, with the potential for the central bank to initiate its first rate cut of at least 0.25% since it began raising rates in March 2021.

“If my forecast is correct, the market will bankrupt a few banks within that period, forcing the Fed into cutting rates and announcing the resumption of the BTFP,” Hayes wrote, arguing that this sequence of events is crucial for determining the future availability of dollar liquidity from the Fed and the U.S. Treasury.

Crypto market impact

Hayes anticipates that bitcoin would “meaningfully correct” around March 12 alongside the broader financial markets in this scenario but rebound before the Fed meeting amid the expectation of further liquidity injection. “I expect bitcoin to experience a healthy 20% to 30% correction from whatever level it has attained by early March,” Hayes said. “The washout could be even more severe if the slate of U.S.-listed spot bitcoin ETFs have already commenced trading.” 

“Imagine if the anticipation of hundreds of billions of fiat flowing into these ETFs at a future date propels bitcoin above $60,000 and close to its 2021 all-time high of $70,000,” he added. “I could easily see a 30% to 40% correction due to a dollar liquidity rug pull. This is why I cannot buy bitcoin until these March decision dates have passed.”

However, by the end of March, Hayes expects the crypto market to resume a positive trend amid speculation surrounding the impact of the halving event in April — when Bitcoin’s block reward gets cut in half.

Alternate scenarios and global curveballs

Hayes acknowledged that if his thesis is wrong, alternative outcomes would be that the RRP decline is more gradual, propping up liquidity into Q2, the BTFP is extended ahead of the March deadline, or the Fed's interest rate decision becomes less critical due to overall market stimulus. 

Additionally, global events such as China injecting substantial yuan credit into the global markets or Japanese investors selling U.S. Treasuries in favor of higher-yielding Japanese bonds could throw a curveball into the forecast, Hayes said.