Bank cash reserves held at the Federal Reserve dropped to approximately $2.93 trillion last week, approaching levels that historically have triggered policy responses. Adam Livingston, a bitcoin-focused author and market commentator, believes reserves are within five weeks of reaching a “danger zone” that could prompt changes in Federal Reserve policy.

The Kobeissi Letter, an independent macro markets newsletter run by analyst Adam Kobeissi, reported this figure in an October 25 post tracking reserve balances. Reserve balances represent cash that banks keep on deposit at the Fed. When this number drops, dollar liquidity becomes tighter, and short-term funding markets can become more sensitive to changes.

### Factors Draining Liquidity

Livingston identifies three main factors pulling cash out of the banking system:

1. **Treasury Rebuilding Cash Balances**
The U.S. Treasury has been rebuilding its cash balance at the Fed. When the government sells more Treasury bills to fill that account, it absorbs private cash and reduces bank reserves.

2. **Federal Reserve’s Quantitative Tightening (QT)**
The Fed is shrinking its portfolio by letting bonds mature without replacing them. This process removes cash from the financial system.

3. **Growing Currency in Circulation**
Other Fed liabilities, like currency held by the public, grow over time. This takes up balance sheet space and leaves less room for bank cash unless policy adjusts.

### Implications for Federal Reserve Policy and Bitcoin Markets

Livingston has observed a pattern in previous monetary cycles. When cash becomes scarce and funding markets experience stress, Federal Reserve officials typically slow balance sheet runoff and take steps to keep overnight rates stable. These turning points often align with stronger bitcoin performance.

He highlights three historical examples:

– The 2019 repo market crisis, where funding rates spiked before the Fed intervened.
– The 2020 emergency policy response, which included massive liquidity injections.
– The 2023 regional bank troubles, prompting new Fed lending facilities.

Each event coincided with significant rallies in bitcoin prices, suggesting a connection between easing monetary conditions and digital asset performance.

### The Impact of Bitcoin ETFs

Another important factor Livingston discusses is the role of spot bitcoin exchange-traded funds (ETFs). These products create steady demand for bitcoin, reducing the amount of coins readily available to trade. He argues this creates scarcity conditions in the market.

If Federal Reserve policy signals shift toward easier monetary conditions and liquidity improves, the smaller tradable supply could amplify bitcoin price moves. Less available supply combined with easier monetary policy tends to make price rallies more pronounced.

### Looking Ahead

The current level of bank cash reserves is near the low end of recent ranges. Livingston frames the situation as a potential “mother-of-all liquidity pivots.” He expects the Federal Reserve may need to adjust policy as reserves approach critical thresholds.

As of now, bank cash held at the Federal Reserve stands at approximately $2.93 trillion, down from higher levels earlier this year. Market participants will be watching closely for signs of policy shifts that could have significant implications for both traditional financial markets and the evolving digital asset space.
https://coincentral.com/bitcoin-poised-for-explosive-rally-as-fed-bank-reserves-hit-critical-threshold/