Bank Reserve Drop Sparks Bitcoin Liquidity Debate

The recent drop in bank reserves of $88 billion has led to speculation about its impact on Bitcoin's liquidity. However, a closer look at the data reveals that this decline is not as straightforward as it seems.

The Federal Reserve's H.4.1 release shows that bank reserves fell from $2.969922 trillion on September 23 to $2.881686 trillion on September 30. At first glance, this would suggest a liquidity squeeze for Bitcoin. However, the weekly-average series rose from $2.930193 trillion to $2.948090 trillion during the same period.

This apparent contradiction highlights the importance of understanding the different measures used to gauge bank reserves and their relationship to Bitcoin's liquidity. The Treasury General Account, which holds government funds at the Fed, also shows a mixed picture: its Wednesday balance rose $36.729 billion, while its weekly average fell $28.410 billion.

A closer examination of the data reveals that the decline in bank reserves was largely due to Treasury cash and reverse repos, primarily involving foreign official accounts. The median cost of Treasury-backed overnight borrowing on September 30 was 3.90%, within the range of the five latest observed readings.