The issuance of $125 billion in U.S. Treasury bonds is coming: risks of liquidity withdrawal in the encryption market and defense strategies.

The U.S. Treasury will conduct a concentrated auction of $125 billion in medium- to long-term government bonds this week, along with the simultaneous issuance of $40 billion in investment-grade corporate bonds, coinciding with a shortened two-day trading period due to the holiday. For the cryptocurrency market, this is not an isolated fiscal event, but rather a stress test—testing the current market's vulnerability under conditions of tightening liquidity. As researchers closely monitoring the relationship between macro liquidity and encryption assets, we believe that market volatility will significantly amplify this week, and investors should adopt a defensive posture in response.

1. Liquidity Extraction Mechanism: Why Government Bond Issuance is the "Invisible Water Pump" of the Crypto World

The correlation between the encryption market and the US Treasury market is transmitted through two channels: real interest rates and liquidity premiums.

1. Real interest rate channel:

The 10-year TIPS (Treasury Inflation-Protected Securities) real interest rate serves as a proxy indicator for the real cost of dollars and shows a significant negative correlation with BTC prices. During the balance sheet reduction cycle in October 2024, when the TIPS real interest rate rose from 1.7% to 1.9%, Bitcoin fell by 18.3% within two weeks. The current TIPS rate is 1.83%, and if a treasury auction causes the rate to break through 1.9%, it will trigger a risk budget rebalancing among institutional investors, putting BTC to the test at a support level of $92,000.

2. Liquidity Premium Channels:

The issuance of government bonds attracts subscriptions from money market funds and the banking system, temporarily freezing liquidity. Last week, the balance of the Overnight Reverse Repurchase Agreement (ON RRP) in the U.S. fell to $480 billion, close to the lowest level in 2021, indicating a weak liquidity buffer in the banking system. The issuance of $125 billion in government bonds will directly absorb about $30-50 billion in cash, with the encryption market being at the end of risk assets, liquidity loss will be the first to bear the brunt.

3. Risk contagion channels:

The recent sharp decline in tech stocks (the Nasdaq dropped from 18,500 points to 17,800 points) has triggered cross-asset risk parity funds to deleverage. These funds typically package BTC with the Nasdaq as "growth risk exposure" and reduce their holdings in tandem when volatility rises. This week's tightening liquidity may amplify this trend.

II. Historical Data Backtracking: Performance of the encryption Market during Government Bond Auction Week

Statistics on the performance of BTC during the 8 large national bond auction weeks (weekly issuance volume > 100 billion USD) from 2023 to 2024:

Auction Week Issuance Volume BTC Weekly Price Change Volatility Change Main Driving Factors

August 2023 103 billion -5.2% +32% Interest rate rise

March 2024 118 billion -3.8% +28% Bank liquidity crisis

October 2024 125 billion -11.1% +45% Expectations for accelerated balance sheet reduction

Summary of rules:

• Average weekly decline: -6.7%

• Average volatility amplification: +35%

• Small market cap cryptocurrencies (market cap <1 billion) generally fell more than 15%, with liquidity drying up causing slippage to soar to 2%-4%.

3. Three Elements of Defense Strategy: Positioning, Target Selection, and Emotion Monitoring

Strategy 1: Dynamic Position Management - "6-3-1" Allocation Principle

Based on the risk parity model, it is recommended to adopt a tiered position control:

• 60% Core Position: BTC and ETH and other mainstream assets serve as the ballast of the portfolio. These two types of assets are relatively resilient during liquidity crises, and the order book depth is sufficient to support large transactions. It is currently recommended to increase the core position to 65% to hedge against tail risk.

• 30% liquid funds: used for averaging down during extreme panic or chasing high during breakthroughs. Keep cash on hand during government bond auction periods, without rushing to enter the market.

• 10% Satellite Position: Limited to value coins that have actual ecological support and a daily trading volume > 50 million USD, and must meet stringent standards such as smart contract audits and team real-name verification.

Risk control effect: This configuration results in a drawdown of approximately 4.5%-5% when the market declines by 10%, significantly lower than the over 8% drawdown of a fully invested single cryptocurrency.

Strategy Two: Target Liquidity Screening - Avoid "Liquidity Traps"

Currently, institutional funds are generally tightening, and the liquidity premium for small coins has disappeared. Data shows that for altcoins ranked 50 and below by market capitalization, the average bid-ask spread has expanded from 0.3% to 1.2%, and a single transaction of $100,000 can lead to slippage of more than 1.5%.

Selection Criteria:

• Market cap threshold: Only consider the top 20 assets by market cap.

• Trading Volume: Average daily trading volume over the past 30 days > 100 million USD

• Exchange Depth: Top platforms like Binance and Coinbase have order book top 10 orders exceeding $5 million.

Conclusion: This week, one should completely avoid small-cap tokens and focus on BTC and ETH. The order book depth of these two has increased by over 40% compared to 2023, and even in the face of liquidity shocks, the price discovery mechanism remains relatively effective.

Strategy 3: Quantitative Emotion Indicators - Refuse to Be an "Emotion Puppet"

Newbies often fall into panic selling due to short-term volatility or FOMO chasing highs. It is recommended to monitor two hard indicators:

1. Fear & Greed Index

• Threshold: <30 enters extreme fear zone, reduce selling; >70 enters greed zone, decisively reduce positions

• Current reading: about 28, in the panic zone, it is not advisable to blindly cut losses.

2. 10-Year TIPS Real Interest Rate

• Threshold: **1.90%** is the risk warning line, crossing it puts pressure on the encryption market; **1.70%** is the opportunity line, falling below it allows for increased positions.

• Current level: 1.83%, in the observation window

Operational Advice: When the TIPS interest rate exceeds 1.90% and the Fear Index is less than 25, a small position (5%) can be taken to go long; when the interest rate drops below 1.70% and sentiment rises above 40, gradually increase the position to the target size.

4. Practical Inspection Checklist: Trading Discipline for This Week

During the government bond auction week, strictly following the checklist below can avoid 90% of novice mistakes:

Preparation before the meeting (Monday):

• [ ] Reduce leverage to below 3x or completely close the contract

• [ ] Check if the stop-loss order is set up correctly, with a slippage tolerance not exceeding 0.5%.

• [ ] Withdraw 20% of profits to the cold wallet to realize partial gains.

Auction period (Tuesday - Thursday):

• [ ] Check the Treasury auction rates and Bid-to-Cover Ratio daily at 10:00 AM (Eastern Time)

• [ ] Subscription multiple < 2.5 times is considered a liquidity tightness signal, no new positions will be opened on that day.

• [ ] When the fear index falls below 25, only take a small long position (5%) when BTC drops below $93,000.

Post-meeting evaluation (Friday):

• [ ] If the weekly decline is <5% and the TIPS rate has not broken 1.9%, it is considered a pass for the stress test, and positions can be restored next week.

• [ ] If the weekly drop exceeds 8% or the interest rate breaks 1.95%, then enter defensive mode, with cash positions not below 50%.

5. Core Logic: Survive in the volatility, rather than profit from the volatility.

The essence of this week's market is a liquidity stress test, rather than a trend reversal. In a correction similar to last October, surviving investors preserved their principal in the following ways:

1. Reduce leverage in advance: Decrease the position from 80% to 45% before the auction week, avoiding an 11% drop impact.

2. Stick to mainstream coins: The drawdown of holding a BTC/ETH combination is only 7.2%, while the average drawdown of holding small coins reaches 23%.

3. Strictly implement stop-loss: The BTC position with a stop-loss at $92,000 avoided a deeper loss as it subsequently fell to $88,000.

Final suggestion: The current market is in a "high volatility + low directionality" phase, where risk management takes precedence over profit. Rather than guessing the bottom, it is better to establish a mechanism of "surviving during downturns and being on board during upswings." Remember, 90% of the profits in the encryption market come from 10% of the time, while losses occur during 90% of the time. Endure, and you will be able to see the other side.

Risk Warning: The cryptocurrency market trades 24 hours a day, with no limits on price fluctuations. This analysis is based on publicly available market data and historical statistics, and does not constitute investment advice. The results of U.S. Treasury auctions, TIPS rates, and macroeconomic sentiment may change rapidly, so please ensure proper personal risk isolation and position management.