[Analysis] Fed Enters 'Liquidity Risk Zone', Financial Instability More Concerning Than Bitcoin Rise

2025.10.29 (Wed) 00:17

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The Federal Reserve's entry into the 'liquidity risk zone' due to reduced liquidity is not a signal for Bitcoin's rise, but a warning of financial instability.

Analysis suggests that the Federal Reserve's bank reserves have fallen below $3 trillion, approaching a 'danger zone'. This reduction in reserves, which act as a buffer for the financial system, is not just a statistical change. It's a signal that overall market liquidity has tightened and a 'warning light' has turned on for asset markets.

According to Fed statistics, bank reserves deposited with the central bank have recently fallen to $2.93 trillion, the lowest level since 2023. Market analysts warn, “If this trend continues, reserves will enter the 'danger zone' within weeks.” This is because the Fed's quantitative tightening (QT) policy, implemented to curb inflation, is rapidly eroding the financial sector's cash reserves.

The decrease in reserves leads to reduced liquidity in the financial system, which increases volatility in investment markets. Interestingly, Bitcoin has often risen in such phases. When liquidity tightens, some investors turn to alternative assets outside the dollar system, especially Bitcoin. Similar trends were observed in 2019 and 2023. Therefore, some market participants predict that “Bitcoin's rise is not far off.”

U.S. Federal Reserve Assets (Unit: Trillion Dollars) The chart shows the rapid expansion of Fed assets due to quantitative easing (QE) policies after the 2008 financial crisis and large-scale asset purchases during the COVID-19 pandemic, followed by a decrease during the quantitative tightening (QT) process. (Source: FRED, Federal Reserve Board of Governors /FT)

However, optimism should be cautioned. The decrease in reserves could be an 'opportunity' for Bitcoin, but it could also be a precursor to greater risks. A tightening liquidity environment typically pressures the prices of risk assets across the board. Bitcoin is no exception. Above all, unless the Fed moves to cut interest rates or switch to liquidity provision, financial institutions' surplus funds will not easily increase. If Bitcoin shows a short-term surge in this situation, it's likely to be a 'flight to safety due to liquidity concerns' rather than a 'trust-based rise'.

The Fed's policy decisions are also a crucial variable. If reserves reach their limit, the Fed will eventually have to stop tightening and change direction. However, if this timing is misjudged, the market could fluctuate dramatically. The Fed's current test is balancing inflation control and financial stability. Shocks are difficult to avoid whichever way it leans.

In this context, the stirring of the Bitcoin market is not entirely welcome news. For digital assets to gain trust as an alternative to the financial system, their structural role should take precedence over speculative reactions. If macroeconomic instability factors like the decrease in reserves become reasons for Bitcoin's rapid rise, it should be seen as another symptom of financial instability.

The Fed's reduction in reserves is not just a matter of numbers. It means blood is draining from the heart of the global financial system. The market should watch this closely. The 'danger zone' is a language of warning, not an investment signal.