Written by Arthur Hayes, Founder of BitMEX
Compiled by: AIMan@ Jinse Finance
For me, the Hokkaido ski season ended in mid-March this year. However, lessons learned on the mountain can still be applied to President Trump's "tariff rage." Every day is different, and there are too many variables interacting - no one knows which snowflake or turn on the skis will trigger an avalanche. The best we can do is estimate the probability of triggering an avalanche. A more accurate technique for assessing slope instability is to ski-cut the slope.
Before descending, one of the group's skiers will walk through the starting area, jumping up and down, in an attempt to trigger an avalanche. If successful, the way the avalanche spreads across the slope will determine whether the guide considers the slope suitable for skiing. Even if an avalanche is triggered, we can still ski, but we must choose our direction carefully to avoid triggering anything more serious than a slide of loose powder. If we see cracks or huge slabs of snow loose and cracking, we will leave quickly.
The key is to try to quantify the worst-case scenario based on current conditions and act accordingly. Trump’s self-proclaimed “Liberation Day” on April 2 was a ski-cut to the steep and dangerous side of global financial markets. The Trump team’s tariff policy borrowed from a book on trade economics called “Balancing Trade: The Unbearable Cost of Ending America’s Trade Deficits” and took an extreme stance. The announced tariff rates were worse than the worst-case estimates of mainstream economists and financial analysts. In the words of avalanche theory, Trump has triggered a continuous avalanche of weak layers that threatens to destroy the entire fugazi (from the US military during the Vietnam War, referring to fake things) fractional reserve filthy fiat currency financial system.
The initial tariff policy represented the worst possible outcome, as both the United States and China took extreme positions, antagonizing each other. While financial asset markets have swung wildly, resulting in trillions of dollars in global losses, the real problem is the rise in volatility in the U.S. bond market (measured by the MOVE index). The index rose to an all-time high of 172 points during the session, before the Trump team pulled out of the danger zone. Within a week of announcing the tariff policy, Trump eased his plans, suspending tariffs on all countries except China for 90 days. Subsequently, Boston Fed Governor Susan Collins wrote in the Financial Times that the Fed was ready to do everything it could to ensure the normal functioning of the market. A few days later, volatility has yet to fall significantly. Finally, U.S. Treasury Secretary Scott was interviewed by Bloomberg and declared to the world that his department was large, especially because his department could significantly increase the speed and scale of Treasury bond repurchases (see Jinse Finance previous report "Arthur Hayes: I believe BTC can reach $250,000 by the end of the year because the U.S. Treasury has dominated the Federal Reserve"). I described this sequence of events as a shift from “everything is fine” to “everything is terrible and we have to act” by policymakers, a surge in the market, and most importantly, a bottom in Bitcoin. That’s right, folks, I predicted $74,500 as a local low.
Whether you characterize Trump’s policy changes as backpedaling or astute negotiating tactics, the result is that the administration intentionally triggered an avalanche in financial markets, and it was so severe that they adjusted policy a week later. Now, as a market, we know a few things. We understand what happens to bond market volatility in a worst-case scenario, we recognize the level of volatility that triggers behavioral changes, and we also know what monetary levers will be pulled to mitigate that. Using this information, we as Bitcoin holders and crypto investors know that the bottom is in because the next time Trump ratchets up tariff rhetoric or refuses to reduce tariffs on China, Bitcoin will rise in anticipation that monetary officials will run the printing presses at maximum levels to ensure bond market volatility remains low.
This article will explore why taking an extreme stance on tariffs leads to a dysfunctional Treasury market (as measured by the MOVE index). I will then discuss how Bessent’s solution — Treasury bond repo — will add a lot of USD liquidity to the system, even though issuing new bonds to buy old bonds does not technically add USD liquidity to the system per se. Finally, I will discuss why the current situation with Bitcoin and the macroeconomy is similar to what happened when Bessent’s predecessor, Yellen, increased Treasury issuance in Q3 2022 to exhaust the Reverse Repo Program (RRP). Bitcoin hit a post-FTX local low in Q3 2022, and now, after Bessent launched his “non-QE” QE policy, Bitcoin hit a local low in this bull cycle in Q2 2025.
The greatest pain
I will reiterate that Trump’s goal is to get the U.S. current account deficit to zero. Getting there quickly will require painful adjustments, and tariffs are his administration’s go-to tactic. I don’t care if you think this is a good thing or if Americans are ready to work 8+ hour shifts in iPhone factories. Trump was elected in part because his supporters believe that globalization has hurt them. His team is hell-bent on delivering on a campaign promise to, as they put it, put “Main Street” before “Wall Street.” All of this is based on the assumption that someone close to Trump can get re-elected this way, but that’s not a sure thing.
The reason financial markets crashed on Liberation Day is that if foreign exporters earn fewer or no dollars at all, they can’t buy as many or even any U.S. stocks and bonds. Furthermore, if exporters have to change their supply chains or even rebuild them within the U.S., they have to finance that reconstruction in part by selling their holdings of liquid assets, such as U.S. bonds and stocks. That’s why the U.S. market, and any market that is overly dependent on U.S. export revenues, crashed.
The silver lining, at least initially, was that fearful traders and investors piled into the Treasury market. Treasury prices rose and yields fell. The 10-year yield fell sharply, which was good for Bessent because it helped him to flood the market with more bonds. But the wild swings in bond and stock prices increased market volatility, which was a death knell for certain types of hedge funds.
Hedge funds, hedge…sometimes, but always use a lot of leverage. Relative Value (RV) traders typically identify a relationship or spread between two assets, and if the spread widens, they use leverage to buy one asset and sell the other, anticipating a mean reversion. Generally speaking, most hedge fund strategies implicitly or explicitly short market volatility at a macro level. When volatility falls, mean reversion occurs. When volatility rises, things get messy and the stable “relationship” between assets breaks down. This is why risk managers at banks or exchanges that provide leverage to hedge funds raise margin requirements when market volatility rises. When hedge funds receive a margin call, they must close their positions immediately or they are liquidated. Some investment banks are happy to bankrupt their clients by issuing margin calls during periods of extreme market volatility, taking over their bankrupt clients’ positions, and then profiting when policymakers inevitably print money to suppress volatility.
What we really care about is the relationship between stocks and bonds. Since U.S. Treasuries are nominally the risk-free asset and the global reserve asset, when global investors flee equities, U.S. Treasury prices rise. This makes sense because fiat currencies must exist to earn a yield, and the U.S. government will never voluntarily go bankrupt in dollar terms because it can print money effortlessly. The real value of Treasuries can and does fall, but policymakers don't care about the real value of all that junk fiat assets that the world is flooding with.
In the first few trading days after “Liberation Day,” stocks fell and bond prices rose/yields fell. Then, something happened and bond prices fell in tandem with stocks. The 10-year Treasury yield swung back and forth on a scale not seen since the early 1980s. The question is, why? The answer, or at least what policymakers think the answer is, is extremely important. Is there a structural problem in the market that must be fixed by the Fed and/or the Treasury printing money in some form?
From Bianco Research, the bottom shows the magnitude of the abnormal 3-day change in the 30-year bond yield. The magnitude of the change triggered by the tariff panic is comparable to market moves during financial crises such as the 2020 COVID-19 pandemic, the 2008 Global Financial Crisis, and the 1998 Asian Financial Crisis. This is not a good thing.
The RV Fund's Treasury basis trade position may be unwound, which is a question. How big is this trade?
February 2022 is critical for the US Treasury market because US President Biden decided to freeze the holdings of Russian Treasury bonds, the world's largest commodity producer. This actually shows that no matter who you are, property rights are no longer a right, but a privilege. Therefore, overseas demand continues to weaken, but RV funds fill the gap as marginal buyers of US Treasury bonds. The above chart clearly shows the increase in repo positions, which can be used as a proxy for the size of basis trading positions within the market.
Basis Trading Overview:
Treasury bond basis trading involves buying a cash bond and selling a bond futures contract at the same time. The impact of bank and exchange margins is crucial. The size of an RV fund's position is limited by the cash amount required by the margin. Margin requirements vary with market volatility and liquidity factors.
Bank Guarantee:
To get the cash it needs to buy bonds, the fund enters into repurchase agreements (repo) transactions. Banks agree to pay a small fee to immediately advance cash to settle the bonds to be purchased as collateral. Banks will require a certain amount of cash margin to cover the repo.
The more volatile the bond price, the higher the margin the bank requires.
The less liquid a bond is, the more margin banks require. Liquidity is always concentrated in certain tenors of the yield curve. For global markets, the 10-year is the most important and liquid. When the latest 10-year bond is auctioned, it becomes the "on-the-run" 10-year bond. It is the most liquid bond. Then, over time, it moves further and further away from the liquidity center and is considered "off-the-run." Over time, new issues naturally become "off-the-run," and the amount of cash required to fund repo transactions increases while funds wait for the basis to collapse.
Essentially, during periods of higher market volatility, banks worry that if they need to liquidate a bond, the price will fall too quickly and liquidity won’t be enough to absorb their market sell orders. So they raise their margin limits.
Futures Exchange Margin:
Each bond futures contract has an initial margin level, which determines the amount of cash margin required for each contract. This initial margin level will fluctuate with market volatility.
The exchange is concerned with its ability to close out a position before the initial margin is fully used up. The faster prices move, the more difficult it is to ensure solvency; therefore, when market volatility increases, margin requirements also increase.
Eliminate fear:
The huge impact of Treasury basis trades on the market and how the major players are funded has been a hot topic in the Treasury market. The Treasury Borrowing Advisory Committee (TBAC) has provided data in past quarterly refinancing announcements (QRAs) that confirms the following statement: since 2022, the marginal buyers of US Treasury bonds have been RV hedge funds participating in such basis trades. Below is a link to a detailed paper submitted to the Commodity Futures Trading Commission (CFTC), which is based on data provided by TBAC since April 2024.
The chain of cyclical reflexive market events, amplified in horrific fashion in each cycle, goes something like this:
1. If bond market volatility rises, RV hedge funds will need to deposit more cash with banks and exchanges.
2. At a certain point, these funds will not be able to afford the additional margin calls and must close their positions simultaneously. This means selling the spot bonds and buying back the bond futures contracts.
3. Liquidity in the spot market decreases as market makers reduce the size of their bids for spreads to protect themselves from harmful one-way flows.
4. As liquidity and prices decline together, market volatility increases further.
Traders are well aware of this market phenomenon, and regulators themselves and their financial journalist goons have been sending out warning signs about it. So as volatility in the bond market increases, traders rush to buy before they are forced to sell, which exacerbates downside volatility and causes the market to crash faster.
If this is a known source of market stress, what policies can the U.S. Treasury implement within its departments to keep money (and thus leverage) flowing to these RV funds?
Treasury bond repurchase
A few years ago, the U.S. Treasury Department started a bond buyback program. Many analysts looked ahead and wondered how this might fuel or encourage some money printing. I will lay out my theory on the effect of buybacks on the money supply. But first, let's understand how the program works.
The Treasury will issue new bonds and use the proceeds to buy back off-the-run bonds. This will cause the value of off-the-run bonds to rise, possibly even above fair value, as the Treasury will be the largest buyer in the illiquid market. RV funds will see the basis between off-the-run bonds and bond futures contracts narrow.
Basis trading = long spot bonds + short bond futures
Long cash bond prices will rise as older bond prices rise in anticipation of Treasury bond purchases.
Therefore, the RV funds will lock in profits by selling the older bonds, which are now more expensive, and closing their short bond futures contracts. This frees up valuable funds at the banks and exchanges. Since the RV funds are making money, they will jump right into the basis trade at the next Treasury auction. As prices and liquidity rise, bond market volatility decreases. This reduces the fund's margin requirements and allows it to take larger positions. This is procyclical reflexivity at its best.
Markets will now relax, knowing that the Treasury is providing more leverage to the financial system. Bond prices rise; all is well.
Treasury Secretary Besset touted his new tool in the interview because the Treasury can theoretically do unlimited repurchases. The Treasury cannot issue bonds at will without a spending bill approved by Congress. However, the essence of a repurchase is that the Treasury issues new bonds to repay old bonds, and the Treasury has issued new bonds to repay the principal of maturing bonds. Since the Treasury buys and sells bonds under the same name with a primary dealer bank, the transaction is cash flow neutral, so it does not require the Fed to borrow money to conduct repurchases. Therefore, if reaching the repurchase level can alleviate market concerns about a collapse in the Treasury market and cause the market to accept lower yields on bonds that have not yet been issued, then the Treasury will go all out to repurchase. It can't stop, and it won't stop.
A note on Treasury bond supply
Besset knows that the debt ceiling will be raised sometime this year, and that the government will continue to spend at an increasingly aggressive pace. He also knows that Elon Musk, through his Department of Government Efficiency (DOGE), is not cutting spending fast enough for a variety of structural and legal reasons. Specifically, Musk’s estimate for spending cuts this year has dropped from an expected $1 trillion per year to a paltry $150 billion (at least given the sheer size of the deficit). This leads to an obvious conclusion: the deficit may actually widen, forcing Besset to issue more Treasury bonds.
As it stands, the deficit for FY25 ending in March is 22% higher than the deficit for FY24 at the same point in the reporting year. Give Musk the benefit of the doubt — and I know some of you would rather burn down your Tesla to Grimes than believe it — he’s only been at it for two months. More worryingly, uncertainty among businesses about the magnitude and impact of tariffs, combined with a falling stock market, will lead to a significant drop in tax revenues. This would point to a structural reason why the deficit will continue to widen even if DOGE succeeds in cutting more government spending.
Besset fears deep down that he will have to revise upward his borrowing expectations for the rest of the year because of these factors. With the coming flood of Treasury supply approaching, market participants will demand significantly higher yields. Besset needs the RV Fund to step up its game, use maximum leverage, and buy out the bond market completely. Therefore, buybacks are imperative.
The positive impact of repos on USD liquidity is not as direct as central bank money printing. Repos are budget and supply neutral, so the Treasury can do unlimited repos to create huge RV purchasing power. Ultimately, this allows the government to finance itself at affordable rates. The more debt that is issued, which is not purchased with private savings but with leveraged funds created through the banking system, the greater the growth in the quantity of money. Then we know that when the amount of fiat money increases, the only asset we want to own is Bitcoin. Go for it!
Obviously, this is not an unlimited source of USD liquidity. There is a limited amount of unissued Treasuries available for purchase. However, repo is a tool that can help Besset mitigate market volatility in the short term and fund the government at an affordable level. This is why the MOVE index fell. As the Treasury market stabilized, so did the fear of the entire system collapsing.
Same scene
I liken this trading strategy to the third quarter of 2022. In the third quarter of 2022, a “decent” white boy like Sam Bankman-Fried (SBF) is broke; the Fed is still raising rates, bond prices are falling, and yields are rising. Yellen needs to find a way to stimulate the market so that she can open its throat with a red-soled stiletto and excrete bonds without triggering a gag reflex. In short, as it is now—with increased market volatility due to a shift in the global monetary system—it is a bad time to increase bond issuance.
RRP balance (white) and Bitcoin (gold)
Just like today, but for different reasons, Yellen could not count on the Fed to ease monetary policy because Powell was on his Paul Volcker-inspired sideshow Prohibition tour. Yellen, or some brilliant adviser, correctly deduced that the dead money in RRP (reverse repo) held by money market funds could be attracted into the leveraged financial system by issuing more Treasuries, which the funds were happy to hold because the yields were slightly above RRP. This allowed her to inject $2.5 trillion of liquidity into the market between the third quarter of 2022 and early 2025. During this period, the price of Bitcoin increased nearly 6 times.
This sounds like a pretty optimistic setup, but people are panicking. They know that high tariffs and the Chi-Merica divorce are bad for stock prices. They think Bitcoin is just a high-beta version of the Nasdaq 100. They are bearish and don’t think a harmless-sounding buyback program can increase future dollar liquidity. They sit on the sidelines, waiting for Powell to ease policy. He can’t just ease policy or do quantitative easing like every Fed Chair from 2008 to 2019 did. Times have changed, and now the Treasury is burdened with printing more money. If Powell really cared about inflation and the long-term strength of the dollar, he would eliminate the impact of the Treasury’s actions under Yellen and now Bessant. But he didn’t do it then, and he won’t do it now; he will be scorched in the “turtle” chair and manipulated.
Just like in the third quarter of 2022, people thought that Bitcoin could fall below $10,000 after hitting a cycle low of around $15,000 due to a combination of adverse market factors. Now some people believe that the price of Bitcoin will fall below $74,500 and fall below $60,000, and the bull market is over. Yellen and Bessant are no joke. They will ensure that the government has access to funds at affordable rates and suppress volatility in the bond market. Yellen will issue more short-term Treasury bonds than long-term Treasury bonds, injecting limited RRP liquidity into the system; Bessant will repurchase old bonds by issuing new bonds and maximize the ability of the RV fund to absorb new bond supply. Neither of these is the quantitative easing policy that most investors are familiar with and recognize. Therefore, they turn a blind eye to it and have to chase the rise once Bitcoin confirms a breakthrough.
verify
For buybacks to be a net stimulus, the deficit must keep rising. On May 1, we will get a glimpse of the upcoming borrowing plans and how they compare to previous estimates through the Treasury’s Quarterly Refunding Announcement (QRA). If Bessant has to borrow more or is expected to borrow more, it means that tax revenues are expected to fall; therefore, this will lead to a wider deficit if spending remains the same.
Then, in mid-May, we get the official deficit or surplus data for April from the Treasury, which includes actual tax revenues as of April 15th. We can compare the year-over-year change so far in FY25 to see if the deficit is widening. If the deficit is widening, bond issuance will increase, and Bessant must do everything he can to ensure that risk-averse funds can increase their basis trade positions.
Trading strategies
Trump skied down a steep slope and triggered an avalanche. Now we finally know the level of pain or volatility the Trump administration can endure before easing into any policy implementation that the market believes will negatively impact the cornerstone of the fiat financial system (MOVE index). This will trigger a policy response, the impact of which will be to increase the supply of fiat dollars available to purchase U.S. Treasuries.
If increases in the frequency and size of repo are not enough to calm the markets, the Fed will eventually find a way to ease policy. They have already said they will. Most importantly, they lowered the rate on quantitative tightening (QT) at their most recent meeting in March, which is positive for USD liquidity on a forward-looking basis. However, the Fed could do more than QE. Here is a short list of procedural policies that are not QE but that would enhance the market’s ability to absorb additional Treasury issuance; one of which may be announced at the Fed’s May 6-7 meeting:
Exempt banks from the supplementary leverage ratio (SLR) requirement for Treasury bonds. This allows banks to use unlimited leverage to buy Treasury bonds.
Implementing a "QT reversal", the funds raised from the maturing mortgage-backed securities (MBS) are reinvested in newly issued Treasury bonds. The size of the Fed's balance sheet remains unchanged, but this will bring marginal buying pressure of $35 billion per month to the Treasury market in the next few years until all MBS stocks mature.
The next time Trump hits the tariff button — which he will do to ensure that countries respect his authority — he will be able to demand more concessions, and Bitcoin will not be hammered as some stocks have been. Bitcoin knows that deflationary policies cannot be sustained for long given the insane current and future debt levels required for the dirty financial system to function.
The collapse of the Mt. Sharpe World ski resort set off a secondary market avalanche that could have quickly escalated to level five, the highest level. But the Trump team reacted quickly, changed course, and pushed the empire to the other extreme. The foundation of the avalanche was reinforced with the driest and wettest "pow pow" solidified from crystallized dollar bills provided by U.S. Treasury repurchases. It's time to transition from slogging up the mountain with a backpack full of uncertainty to jumping off the powder pillow and cheering how high Bitcoin will fly.
As you can see, I am very bullish on Bitcoin. At Maelstrom, we have maximized our cryptocurrency positions. Right now, everything revolves around buying and selling different cryptocurrencies to accumulate Bitcoin. During the downturn when Bitcoin price fell from $110,000 to $74,500, the largest buying volume was Bitcoin. Bitcoin will continue to lead the market because it is the direct beneficiary of more US dollars in circulation from future monetary liquidity injections to mitigate the impact of the US-China decoupling. Today, the international community believes that Trump is a lunatic who wields the weapon of tariffs in a crude manner, and any investor holding US stocks and bonds is looking for something with anti-establishment value. In physical terms, that is gold. In digital terms, that is Bitcoin.
Gold has never been seen as a high-beta version of US tech stocks; therefore, it has performed well as the oldest anti-establishment financial hedge as the overall market crashes. Bitcoin will break away from its association with US tech stocks and rejoin gold in its “only up, no down” trend.
What about Altcoin?
Once Bitcoin breaks through its all-time high of $110,000, it will likely surge, further consolidating its dominance. Perhaps it won’t rise to $200,000. Then, Bitcoin will start rotating into shit coin. Altcoin are rising (AltSzn: Chikun), come on!
Aside from the shiny new shit coin meta, the best performing tokens are the ones that are tied to both earning profits and returning profits to stakers. There are only a handful of such projects. Maelstrom has been working hard to accumulate positions in certain eligible tokens and is not done buying these gems yet. They are gems because they got hammered like all the other shit coin in the recent sell-off, but unlike 99% of the shit projects, these gems actually have paying customers. Convincing the market to give your project another chance after launching it in Down Only mode on a CEX is impossible due to the sheer volume of tokens. Shit coin divers want higher staking APYs where the rewards come from actual profits because those cash flows are sustainable. To promote our product, I will write a full article about some of these projects and why we think their cash flows will continue to grow in the near future. Until then, back up the trucks and buy everything!
