Arthur Hayes: Trump's tariffs triggered a market avalanche, and the bottom for Bitcoin has been reached

Original Title: 《Ski Cut》

Compiled by: Patti, ChainCatcher

In mid-March this year, my ski season in Hokkaido came to a successful end. However, the lessons learned on the slopes resonated unexpectedly with the tariff turmoil surrounding Trump. Each day was unique, filled with various interacting variables—one could never predict which snowflake or ski turn might trigger an avalanche. All we could do was estimate the probability of triggering an avalanche. In skiing, there is a technique called ski cutting, which allows for a more accurate assessment of slope instability.

Before skiing, one skier in the team would traverse the starting zone, attempting to trigger an avalanche by jumping up and down. If successful, the way the instability propagates will determine whether the guide thinks the slope is suitable for skiing. Even if an avalanche is triggered, we might still choose to ski, but we must carefully select our direction to avoid triggering a larger avalanche. If we see cracks spreading or large slabs loosening, we would immediately evacuate.

Applying this skiing wisdom to the financial markets, Trump's self-proclaimed "Liberation Day" on April 2 was undoubtedly a bold cut into the steep and dangerous slope of the global financial market. The tariff policy from Trump's team, inspired by the economic book Balanced Trade: The Unbearable Cost of Ending America's Trade Deficit, took an extreme stance. The announced tariff rates were so high that they exceeded the worst expectations of mainstream economists and financial analysts. In avalanche theory terms, this action by Trump triggered a sustained weak-layer avalanche, threatening to destroy the entire false fractional reserve banking system.

The initial tariff policy brought about the worst outcomes, as both the U.S. and China took extreme opposing positions. While the financial asset markets experienced severe sell-offs, leading to trillions of dollars in losses globally, the real concern was the surge in the MOVE index, which measures volatility in the U.S. bond market. This index nearly reached a historical intraday high of 172, after which Trump's team quickly retreated from the danger zone. Within a week of announcing the tariffs, Trump softened his plans, suspending the implementation of tariffs on all countries except China for 90 days. Shortly thereafter, Boston Fed President Susan Collins wrote in the Financial Times that the Federal Reserve would take all necessary measures to ensure the normal functioning of the markets. A few days later, as volatility remained high, U.S. Treasury Secretary Scott Basset stated in an interview with Bloomberg that his department would significantly accelerate and increase the pace of Treasury buybacks. I describe this series of events as a sharp shift from "everything is normal" to "everything is terrible, we must do something." As a result, the market soared, and most importantly, Bitcoin rebounded from its lows. Yes, I declared a local bottom at $74,500.

Whether you view the change in Trump's policies as a retreat or a clever negotiation strategy, the fact remains that the government deliberately triggered a financial market avalanche, and the situation was so severe that they had to adjust policies a week later. As market participants, we now have some valuable insights. We understand how the bond market behaves under worst-case volatility conditions, recognize the levels of volatility that trigger changes in market behavior, and know how policymakers will pull monetary levers to alleviate the situation. Armed with this information, we, as Bitcoin holders and cryptocurrency radical investors, firmly believe that the bottom has arrived. Because the next time Trump intensifies his tariff rhetoric or refuses to lower tariffs on China, Bitcoin will rise due to the expectation that monetary authorities will fully engage the printing press to ensure bond market volatility remains subdued.

Why Do Tariffs Disrupt Bond Market Functionality?

This article will delve into why adopting extreme tariff positions leads to disruptions in bond market functionality, as indicated by the MOVE index. I will then discuss Basset's solution—Treasury buybacks—and how this initiative will inject significant dollar liquidity into the system (even though technically, buying old bonds with newly issued bonds does not directly increase dollar liquidity within the system). Finally, I will compare the current Bitcoin and macro environment with the situation in Q3 2022 when Basset's predecessor, Yellen, increased Treasury issuance to exhaust the reverse repo program (RRP).

After the FTX incident, Bitcoin hit a local low in Q3 2022, and now, with Basset rolling out his "non-quantitative easing" quantitative easing artillery, Bitcoin has reached a local low in this bull market in Q2 2025.

The Greatest Pain

I want to reiterate that Trump's goal is to reduce the U.S. current account deficit to zero, and achieving this goal requires painful adjustments. Tariffs became the preferred tool of his administration. I don't care whether you think this is good or bad, nor do I care if Americans are ready to work longer hours in iPhone factories. Part of the reason Trump was elected is that his supporters believe globalization has hurt them. His team was determined to fulfill campaign promises, prioritizing "Main Street" (ordinary people) over "Wall Street." All of this is based on the assumption that the people around Trump can be re-elected along this path, but that is not a foregone conclusion.

The financial markets plummeted on "Liberation Day" (the day Trump announced the tariff policy) because foreign exporters earned fewer or no dollars due to the tariff policy, preventing them from purchasing much or any U.S. stocks and bonds. Furthermore, if exporters need to change supply chains or even rebuild them in the U.S., they must fund the reconstruction by selling liquid assets they hold (such as U.S. bonds and stocks). This led to a collapse in the U.S. market and any market overly reliant on U.S. export income.

However, at least in the initial phase, there was good news: frightened traders and investors flocked to the Treasury market. Treasury prices rose, and yields fell. The yield on the 10-year Treasury bond plummeted, which was good news for the U.S. Treasury Secretary, as it helped him push more Treasuries into the market. However, the significant volatility in bond and stock prices increased market volatility, which was deadly for certain types of hedge funds.

Hedge funds, by definition, sometimes hedge risks, but they always use a lot of leverage. Relative value (RV) traders typically identify relationships or spreads between two assets and use leverage to buy one asset and sell another, expecting the spread to revert to the mean. From a macro perspective, most hedge fund strategies implicitly or explicitly short market volatility. When volatility decreases, mean reversion occurs; but when volatility increases, the market becomes chaotic, and the stable "relationships" between assets collapse. This is why, when market volatility rises, risk managers at banks or exchanges (who explicitly or implicitly provide leverage to hedge funds) will raise margin requirements. When hedge funds receive margin calls, they must immediately liquidate positions to avoid being liquidated. Some investment banks are happy to force clients to liquidate through margin calls during extreme volatility, taking over the positions of bankrupt clients and profiting when policymakers print money to suppress volatility.

What we really care about is the relationship between stocks and bonds. Since U.S. Treasuries are nominally considered risk-free assets and global reserve assets, Treasury prices rise when global investors flee the stock market. This makes sense because paper money must go somewhere to earn a return, and the U.S. government, due to its ability to operate the printing press at zero cost, will never voluntarily go bankrupt in dollars. Although the actual purchasing power of Treasuries may decline, policymakers do not care about the actual value of paper money assets flooding the globe.

In the initial trading days following "Liberation Day," stocks fell while Treasury prices rose/yields fell. However, something happened subsequently that caused Treasury prices to fall along with stocks. The volatility of the 10-year Treasury yield was unprecedented since the early 1980s. The question is, why did this happen? The answer, or at least what policymakers believe is the answer, is crucial. Is there some structural problem in the market that must be resolved through some form of money printing by the Fed and/or the Treasury?

The bottom panel from Bianco Research shows the abnormality of the three-day change in the yield of 30-year bonds. The degree of change caused by the tariff turmoil is comparable to market volatility during financial crises such as the COVID-19 pandemic in 2020, the global financial crisis in 2008, and the Asian financial crisis in 1998. This is not good news.

One possible issue is the unwinding of relative value (RV) funds' basis trading positions in U.S. Treasuries. How large is this trade?

February 2022 was a significant month for the Treasury market, as U.S. President Biden decided to freeze U.S. Treasuries held by Russia, one of the world's largest commodity producers. This move effectively indicated that property rights are not rights but privileges, regardless of who you are. As a result, foreign demand continued to weaken, but relative value funds filled the gap, becoming the marginal buyers of Treasuries. The above chart clearly shows the increase in repo positions, which can serve as a proxy indicator for the size of the basis trading positions in the market.

Basis Trading

Basis trading refers to the strategy where investors simultaneously buy cash-on-the-run bonds and sell bond futures contracts. In this trade, margin requirements from banks and exchanges are key factors. Relative value (RV) funds are limited in their position sizes by the amount of margin required. Margin requirements fluctuate with changes in market volatility and liquidity concerns.

Bank Margin

To obtain funds to purchase bonds, funds engage in repurchase agreements (repos), where banks agree to provide cash for settlement immediately for a small fee, using the bonds to be purchased as collateral. Banks will require a certain amount of cash margin as collateral for the repo transaction.

The greater the volatility in bond prices, the more margin banks will require.

The lower the liquidity of the bonds, the more margin banks will require. Liquidity is always concentrated on certain maturities of the yield curve. For the global market, the 10-year Treasury is the most important and liquid. When the latest issued 10-year Treasury is auctioned, it becomes the current on-the-run 10-year bond, the most liquid. However, over time, it gradually moves away from the liquidity center and is viewed as off-the-run Treasuries. As the current Treasuries naturally transition to off-the-run Treasuries, the amount of cash required to fund repo transactions increases, while funds wait for the basis spread to narrow.

Essentially, during periods of high volatility, banks worry that if they need to liquidate bonds, prices will drop rapidly, and there won't be enough liquidity in the market to absorb their sell orders. Therefore, they will raise margin limits.

Futures Exchange Margin

Each bond futures contract has an initial margin level, which determines the amount of cash margin required for each contract. This initial margin level fluctuates with changes in market volatility.

Exchanges are concerned about their ability to liquidate positions before the initial margin is exhausted. The faster the price volatility, the harder it is to ensure solvency; thus, when volatility rises, margin requirements also increase.

Unwinding Position Concerns

The significant impact of Treasury basis trading on the market and how major participants finance their positions has been a hot topic within the Treasury market. The Treasury Borrowing Advisory Committee (TBAC) has provided data in recent refinancing announcements confirming that since 2022, the marginal buyers of U.S. Treasuries have been relative value (RV) hedge funds engaged in basis trading. Below is a link to a detailed paper submitted to the Commodity Futures Trading Commission (CFTC), which relies on data provided by TBAC in April 2024.

This cyclical market chain event amplifies fear in each cycle:

1. If bond market volatility rises, RV hedge funds will need to pay more cash margin to banks and exchanges.
2. At some point, these funds cannot afford additional margin calls and must liquidate positions simultaneously. This means selling cash bonds and buying back bond futures contracts.
3. As market makers reduce their quoting size at given spreads to protect themselves from toxic one-way flows, liquidity in the cash market declines.
4. As liquidity and prices decline simultaneously, market volatility further increases.

Traders are well aware of this market phenomenon, and regulators and their financial journalists have already sent warning signals about it. Therefore, as bond market volatility increases, traders will act before a forced selling wave, exacerbating the volatility of the market downturn and rapidly worsening the situation.

If this is a known source of market stress, what policies can U.S. Treasury Secretary Basset (BBC) implement within his department to maintain the leverage (i.e., liquidity) of RV funds?

Treasury Buybacks

A few years ago, the U.S. Treasury began implementing a buyback program. Many analysts have extensively discussed this, speculating on how this program would support certain money printing actions. Here, I will outline my theory on the impact of the buyback program on the money supply. But first, let’s take a closer look at how the program works.

The U.S. Treasury will issue new bonds and use the proceeds to buy back illiquid off-the-run bonds. This action will enhance the value of off-the-run bonds, potentially even exceeding their fair value, as the Treasury becomes the largest buyer in the illiquid market. For relative value (RV) funds, this means that the basis spread between their off-the-run bonds and bond futures contracts will narrow.

Basis Trade = Long Cash Bonds + Short Bond Futures

As the Treasury is expected to purchase off-the-run bonds, the prices of these bonds will rise, pushing up the prices of long cash bonds.

Thus, RV funds will choose to sell their now higher-priced off-the-run bonds and close their short bond futures contracts to lock in profits. This operation releases valuable capital on both the bank and exchange sides. Since RV funds are profitable businesses, they will reinvest in basis trading during the next Treasury auction. As bond prices and liquidity rise, bond market volatility decreases, which in turn lowers the margin requirements for funds, allowing them to hold larger positions. This is the best manifestation of positive reflexivity.

Now, market participants can rest assured, as the Treasury is providing more leverage to the system through the buyback program. Bond prices rise, and the market stabilizes.

Basset (the U.S. Treasury Secretary) proudly introduced this new tool in interviews. Theoretically, the Treasury can conduct infinite buybacks, as the repurchase transaction is essentially the Treasury issuing new debt to repay old debt, a process already used to fund principal payments on maturing bonds. This transaction is cash flow neutral, as the Treasury buys and sells bonds with primary dealer banks at the same nominal value without requiring additional borrowing from the Fed. Therefore, if the buyback program can alleviate market fears of a Treasury market collapse and encourage the market to accept lower yields on newly issued bonds, Basset will push the buyback program to the fullest. This process will not stop and cannot be stopped.

Treasury Supply

Basset knows that the debt ceiling will be raised at some point this year, and the government will continue to ramp up spending. He also knows that Elon Musk, through his Department of Government Efficiency (DOGE), cannot quickly cut spending due to various structural and legal reasons. Specifically, Elon estimates that this year's savings have now dwindled to a mere (at least relative to the massive deficit) $150 billion, down from his previous estimate of $1 trillion per year. This leads to an obvious conclusion: the deficit may actually widen, forcing Basset to issue more bonds.

Currently, the deficit for the first three months of fiscal year 2025 is 22% higher than the deficit for the same period in fiscal year 2024. For Elon’s sake—I know some of you would rather burn while listening to Grimes' music in a Tesla than face this reality—he only began cutting spending two months ago. However, more concerning is the severity and impact of the tariffs leading to business uncertainty, along with the stock market decline, which will result in a significant drop in tax revenues. This indicates a structural reason: even if DOGE can successfully cut more government spending, the deficit will continue to widen.

Basset is worried that due to these factors, he will have to raise borrowing estimates for the remainder of the year. With the impending flood of Treasury supply, market participants will demand significantly higher yields. Therefore, Basset needs RV funds to leverage up and buy into the bond market aggressively. The buyback program thus becomes particularly important.

The positive impact of buybacks on dollar liquidity is not as direct as central bank money printing. Buybacks are neutral in terms of budget and supply, which is why the Treasury can conduct infinite buybacks to create strong purchasing power for RV funds. Ultimately, this allows the government to finance itself at manageable interest rates. The more debt purchased through leveraged funds created by the banking system rather than private savings, the greater the increase in the money supply. As the amount of paper money increases, the only asset we want to hold is Bitcoin.

Clearly, buybacks are not an infinite source of dollar liquidity. The number of off-the-run bonds available for purchase is limited. However, buybacks are a tool that allows Basset to alleviate market volatility in the short term and finance the government at manageable levels. This is why the MOVE index has declined. As the Treasury market stabilizes, fears of a systemic collapse dissipate.

Market Environment

I compared this trading environment to the market environment in Q3 2022. In Q3 2022, Sam Bankman-Fried (SBF) went bankrupt; the Fed was still raising rates, bond prices were falling, and yields were rising. Former U.S. Federal Reserve Chair Yellen needed a way to boost the market so she could pry open the market's throat with red-soled high heels and issue bonds in large quantities without triggering market backlash. In short, like now, due to the shift in the global monetary system, market volatility was rising, making it a bad time to increase bond issuance.

RRP Balances (white) vs. Bitcoin (gold)

Like today, but for different reasons, Yellen could not count on the Fed to ease policy, as Powell was on a Paul Volcker-inspired, juggling-like austerity journey. Yellen, or one of her clever staffers, correctly deduced that by issuing more Treasuries, she could entice money market funds to direct their interest-free cash from reverse repo agreements (RRP) into the leveraged financial system, as these funds would be willing to hold Treasuries for slightly higher yields than RRP. This allowed her to inject $2.5 trillion of liquidity into the market from Q3 2022 to early 2025. During this period, the price of Bitcoin increased nearly sixfold.

This was a relatively bullish market environment, but people felt scared. They knew that high tariffs and the U.S.-China "decoupling" were detrimental to stock prices. They thought Bitcoin was just a high-beta version of the Nasdaq 100 index. They were bearish and did not understand how a seemingly innocuous buyback program could lead to increased dollar liquidity in the future. They sat back and waited for Powell to ease policy. However, he could not ease policy or provide quantitative easing (QE) directly like his predecessors did from 2008 to 2019. Times have changed; now the Treasury is the main force behind money printing. If Powell truly cared about inflation and the long-term strength of the dollar, he should have offset the impacts of Yellen's and current Treasury Secretary Basset's actions. But he did not then, nor will he now; he will sit in a passive chair and let the situation unfold.

Just like in Q3 2022, when people thought Bitcoin might drop below $10,000 due to a confluence of adverse market factors around the cycle low of about $15,000. Today, some believe Bitcoin will drop from $74,500 to below $60,000, and the bull market is over. Yellen and Basset are not playing around. They will ensure the government secures funding at manageable interest rates and suppresses bond market volatility. Yellen injected a limited amount of RRP liquidity into the system by issuing more Treasuries instead of T-bills; Basset will issue new bonds to buy back old bonds and maximize RV funds' capacity to absorb the increased bond supply. Neither of these actions is QE as most investors know and recognize it. Therefore, they miss the opportunity and will have to chase higher prices once market breakouts are confirmed.

Verification

For the buyback to be a net stimulus, the deficit must continue to rise. On May 1, through the U.S. Treasury's quarterly refinancing announcement (QRA), we will know the future borrowing plans and how they compare to previous estimates. If Basset must borrow more or expects to borrow more, it means tax revenues are expected to decline; thus, with spending unchanged, the deficit will widen.

Then, in mid-May, we will receive official deficit or surplus data for April from the Treasury, including actual data on tax revenues from April 15. We can compare year-on-year changes from the beginning of fiscal year 2025 to observe whether the deficit is widening. If the deficit rises, bond issuance will increase, and Basset must do everything possible to ensure RV funds can increase their basis trading positions.

Trading Strategy

Trump's tariff policy triggered an avalanche, much like a skier cutting a steep and dangerous slope. We now know how much pain or volatility (MOVE index) the Trump administration can tolerate before taking any policy actions that the market perceives as negatively impacting the pillars of the statutory financial system. This will trigger policy responses, the effects of which will increase the dollar supply available to purchase Treasuries.

If the frequency and scale of buybacks are insufficient to calm the market, the Fed will ultimately find a way to ease policy. They have indicated they will do so. Most importantly, they reduced the pace of quantitative tightening (QT) in their recent March meeting, which is positive for future dollar liquidity. However, the Fed can do more than just QE. Here is a short list of procedural policy options that are not QE but can increase the market's capacity to absorb increased Treasury issuance, some of which may be announced at the Fed meeting on May 6-7:

Exempting Treasuries from banks' supplementary leverage ratio (SLR) limits. This would allow banks to use unlimited leverage to purchase Treasuries.
Conducting QT twist operations, reinvesting funds raised from maturing mortgage-backed securities (MBS) into newly issued Treasuries. The size of the Fed's balance sheet remains unchanged, but this will add $35 billion of marginal buying pressure to the Treasury market each month for the next few years until the total MBS matures.

The next time Trump presses the tariff button (he will certainly do so to ensure countries respect his authority), he will be able to demand more concessions, and Bitcoin will not crash alongside certain stocks. Bitcoin knows that given the insane levels of debt required for the current and future functioning of the financial system, deflationary policies cannot be maintained in the long term.

The ski cut from Mt. Sharpe World triggered a level 2 financial market avalanche, which could quickly escalate to level 5, the highest level. But the Trump team reacted, changed direction, and opened new paths for the empire. By using the powder made from the driest, highest-quality dollar bills provided by the Treasury buybacks, the foundation of the slope has been solidified. Now it is time to shift from the arduous climb up the snow-covered mountain filled with uncertainty to jumping down the powdery slope, excitedly screaming to see how high Bitcoin will fly.

As you can see, I am very bullish. At Maelstrom, we have maximized our exposure to cryptocurrencies. Now, it’s all about buying and selling different cryptocurrencies to accumulate Bitcoin. During the pullback of Bitcoin from $110,000 to $74,500, we bought a significant amount of Bitcoin. Bitcoin will continue to lead the way as it is the direct beneficiary of future liquidity injections aimed at alleviating the impacts of the U.S.-China "decoupling." Now, the global community sees Trump as a madman wielding tariffs recklessly, and any investor holding U.S. stocks and bonds is looking for something value anti-establishment. In the physical realm, that is gold. In the digital realm, that is Bitcoin.

Gold has never been seen as a high-beta version of U.S. tech stocks; thus, when the overall market crashes, it performs well as the oldest anti-establishment financial hedge tool. Bitcoin will break free from its association with tech stocks and return to the embrace of "only up, never down" alongside gold.

So, what about shitcoins?

Once Bitcoin breaks through its historical high of $110,000, it may soar, further increasing its dominance. Perhaps it will miss $200,000. Then, funds will shift from Bitcoin to shitcoins. Altcoin season is coming!

Aside from those shiny new shitcoins, the best-performing tokens will be those associated with projects that can both generate profits and return profits to staked token holders. Such projects are few and far between. Maelstrom has been actively accumulating positions in certain qualified tokens and has not finished buying these gems.

They are gems because during the recent sell-off, they were hammered like all other shitcoins, but unlike 99% of junk projects, these gems actually have paying customers. Due to the sheer number of tokens, it is difficult to persuade the market to give projects another chance after tokens are issued on CEX in a "only down, never up" mode. Shitcoin dumpster hopes for higher staking annual percentage yields (APY), with these yields coming from actual profits, as these cash flows are sustainable.

To promote our products, I will write a whole article discussing some of these projects and why we believe their cash flow generation will continue and increase in the near future.

Before that, increase buying power and buy everything!