Bitcoin's Recent Drop Linked to Dollar Liquidity Contraction; U.S. Reviews IRS Rule on Foreign Crypto Accounts
Arthur Hayes, co-founder and former BitMEX CEO, argues that Bitcoin's approximately 25% drop since early October reflects a contraction in U.S. dollar liquidity rather than changes in political messaging. He describes Bitcoin as a "free-market weathervane" of global fiat liquidity, trading on expectations about future money supply. Hayes cites his USD Liquidity Index, noting it fell about 10% since April while Bitcoin rose about 12% during the same period. Inflows into spot Bitcoin ETFs and Digital Asset Treasury firms temporarily masked liquidity stress. Hedge funds executed basis trades by going long on spot Bitcoin ETFs and short on CME futures, driving ETF inflows; as spreads narrowed, these positions were unwound, causing significant ETF outflows. Concurrently, Digital Asset Treasuries slowed purchasing as ETF share premiums fell below net asset value, creating discounts to NAV. Hayes states that without these masking flows, Bitcoin would have to fall to reflect concerns about dollar liquidity contraction. The future trajectory depends on whether the U.S. administration can inject new liquidity, with political pressure before the 2026 midterm elections possibly pushing policymakers to reinstate stimulus despite inflation rhetoric. Hayes maintains a longer-term bullish view on money printing resuming but acknowledges potential short-term retracements for Bitcoin to align with tightening liquidity.
Separately, the White House is reviewing Treasury's proposed rules to join the Crypto-Asset Reporting Framework (CARF), allowing the IRS to access Americans' foreign crypto account data. CARF, created by the OECD in 2022, is a global framework for automatic information-sharing designed to curb offshore tax evasion involving crypto holdings. Dozens of nations have signed CARF, including the G7 members—Japan, Germany, France, Canada, Italy, United Kingdom—and leading crypto hubs like the UAE, Singapore, and the Bahamas. Advisors from the Trump administration previously recommended that the U.S. join CARF, and the White House had earlier urged Treasury and IRS to consider implementing CARF rules. The proposed regulations would bring the United States into CARF and would not impose new reporting requirements on decentralized finance (DeFi) transactions, according to the White House. Implementation aims to deter U.S. taxpayers from moving digital assets offshore while supporting U.S. digital asset development. The global rollout of CARF is planned for 2027.
