Is the crypto world about to change? US banks warn: the risk of Fed tapering in October has surged, will liquidity be "choked off"?

Hello everyone, I am Yun Che. After being in the crypto world for a long time, I know that every move of the Fed is a "market barometer." This time, the warning issued by the American bank is enough to make everyone in the crypto world uneasy—The risk of the Fed reducing its balance sheet (which is QT) in October is rising, and this action is likely to pour cold water on the already sensitive crypto market.
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Let me explain in simple terms what tapering is. In short, it means the Fed is "withdrawing liquidity." During the pandemic in 2020, the Fed madly bought government bonds and printed money, injecting a massive amount of liquidity into the market, which led to a surge in cryptocurrencies alongside this "easy money" trend. Tapering is the opposite; it means letting the bonds in hand expire without renewing them and gradually taking back the money that was previously released, which directly leads to a decrease in available funds in the market, commonly referred to as "tight money."

Why did the Bank of America suddenly warn about the risk of tapering in October? The core reason is that the market has already shown signs of "drought". Recently, reserves in the U.S. banking system have fallen for eight consecutive weeks, first dipping below the $3 trillion mark, which is the lowest level since January this year. More critically, short-term financing market volatility has intensified, with both repo rates and secured overnight financing rates climbing, and many financial institutions have begun to urgently utilize the Fed's standing repo facility to borrow money. These signs indicate that market liquidity has tightened to a critical point.

Interestingly, there are also divisions within the Fed. Chairman Powell previously stated that "the balance sheet reduction might end in the coming months," implying a loosening of policy, but Vice Chairman Bowman insists on minimizing the balance sheet as much as possible. Governor Waller also estimates that the minimum reserve level is around $2.7 trillion, and the current reserves of $2.98 trillion are already very close to this "red line." This internal game of power makes the policy direction in October more uncertain, and uncertainty is precisely the "archenemy" of the crypto world.

For us in the crypto world, the rising risk of tapering is not a trivial matter. It is important to know that cryptocurrencies are typical risk-sensitive assets, relying on sufficient liquidity to support the market. When the Fed first started tapering in 2022, the crypto market experienced a round of sharp declines, with a market cap evaporation of hundreds of billions of dollars. Now, if the tapering risk materializes in October, the hot money in the market will decrease, and investors' risk appetite will also decline, which may lead to a surge in volatility for mainstream coins like Bitcoin and Ethereum, and even a possible correction.

However, there is no need to panic excessively. Currently, Wall Street's expectations for tapering are not uniform. Some institutions believe that the Fed will directly terminate QT at the meeting at the end of October, while others think it will be delayed by a month or two. Moreover, Powell also mentioned that the financial system still has sufficient Liquidity and will not let market fluctuations get out of control. Nevertheless, the "tight money" trend is already very clear, and the "lying win" market in the crypto world is definitely coming to an end.

As a veteran in the crypto world, Yun Che reminds everyone to lower expectations and manage positions well. Instead of worrying about whether the tapering will come, it’s better to pay more attention to the on-chain capital flow and the support levels of mainstream coins. After all, the Fed's policy adjustments have always been "loud thunder, but little rain." Only by being prepared for risk control in advance can we maintain our footing in this liquidity change. The upcoming FOMC meeting at the end of October will be a key point, and we will keep a close eye on it, sharing information with everyone as soon as we have updates. #ETH反弹在即？ $BTC