Arthur Hayes exposes invisible QE! The Federal Reserve prints money to save the market, Bitcoin has not peaked yet.

Legendary trader Arthur Hayes believes that the next phase of the crypto assets cycle is not driven by quantitative easing policies, but rather by the “implicit” quantitative easing policies implemented by the Federal Reserve (FED) through the Standing Repo Facility (SRF). In the article, he explains from a balance sheet perspective how the ongoing U.S. fiscal deficit, hedge fund demand for government bonds financed through repos, and the need for the Federal Reserve (FED) to control financing pressures will translate into an increase in dollar liquidity, ultimately pushing up Bitcoin prices.

2 trillion deficit financing dilemma with no takers

(Source: Substack)

Hayes's logical chain begins with observations about political incentives and public finance arithmetic. The government can fund expenditures with “savings or debt”; in his view, elected officials “are always inclined to overdraw the future to seek re-election in the present.” He believes that, in the case of the United States, the trajectory of development has been set: “Here are estimates from 'Too Big to Fail' (TBTF) bankers and some U.S. government agencies. As you can see, the estimates show that the deficit is about $2 trillion, which needs to be supplemented by about $2 trillion in borrowing.”

An annual deficit of 2 trillion dollars is an astronomical figure, equivalent to about 6% of the US GDP. This means that the US government needs to issue 2 trillion dollars in new national debt to fill the funding gap each year. The question is: who will buy this national debt? Hayes systematically excludes traditional buyer groups.

He believes that after the United States imposed sanctions and froze Russia's foreign exchange reserves in 2022, foreign central banks are no longer reliable marginal buyers. He wrote, “If 'peace under American rule' (Pax Americana) is willing to steal Russia's funds… then any foreign institution holding U.S. Treasury bonds cannot guarantee its own safety.” He concluded that reserve managers “would rather buy gold than U.S. Treasury bonds.” This collapse of geopolitical trust is structural, and the scale of foreign central banks holding U.S. debt has indeed continued to decline over the past two years.

Similarly, given that “the personal savings rate in 2024 is only 4.6%” and “the U.S. federal deficit accounts for 6% of GDP”, he also underestimated the purchasing power of American households. When the deficit exceeds the savings rate, it means that the household sector does not have enough surplus funds to absorb all the issuance of government bonds. He believes that the largest financial center banks in the U.S. only increased their holdings of “about $300 billion” in U.S. Treasury bonds in the fiscal year 2025, while the issuance during the same period reached “$1.992 trillion”. Therefore, although these increases are significant, they are not a decisive factor. Bank holdings account for only about 15% of the issuance, far from sufficient to absorb the entire supply.

Cayman Hedge Funds as Marginal Pricers in Repurchase Arbitrage

(Source: Substack)

Hayes believes that relative value hedge funds—especially those trading through Cayman Islands instruments—are the marginal price setters for the duration of U.S. Treasuries. He cites a recent study by The Federal Reserve (FED) stating: “From January 2022 to December 2024, Cayman Islands hedge funds net purchased $1.2 trillion in U.S. Treasuries… absorbing 37% of the net issuance of Treasuries.”

This data is extremely surprising. Hedge funds in the Cayman Islands absorbed more than a third of the newly issued government bonds, becoming a key pillar of U.S. fiscal financing. The trading structure is very simple: “Buy cash U.S. government bonds, sell corresponding U.S. government bond futures.” This basis trade locks in risk-free arbitrage profits, and although the profits are measured “in basis points,” they can be amplified through high leverage. However, this type of trading only works when the cost of leverage is low and predictable on a daily basis.

This brings us to the core role of the repurchase financing market. Hedge funds finance the purchase of government bonds through the overnight repurchase (Repo) market and need to roll over their loans daily. If the repurchase rate is stable and low, this arbitrage trading can continue. However, if there is pressure in the repurchase market, rates spike, or liquidity dries up, hedge funds will be forced to liquidate positions, which may trigger severe volatility in the government bond market.

Arthur Hayes Logical Chain

Starting Point: The United States annual deficit of 2 trillion dollars needs financing.

Traditional Buyers Absent: Foreign central banks do not trust, household savings are insufficient, banks only buy 300 billion.

Marginal Buyers: Cayman hedge funds absorbed 37% (1.2 trillion) through basis trading.

Key Dependency: Hedge funds require stable low-cost repurchase financing

Pressure Point: If the SOFR rate breaks the upper limit, the repurchase market will collapse.

The Federal Reserve (FED) Rescue: The SRF provides unlimited Liquidity to avoid financing accidents.

Result: SRF balance growth = Invisible QE = Increase in dollar supply = Bitcoin rise

The operation logic of the SRF mechanism and invisible quantitative easing

This channel leads directly to the Standing Repo Facility (SRF). Hayes elaborated on the Federal Reserve's short-term interest rate corridor—“the upper and lower limits of the federal funds rate; currently at 4.00% and 3.75% respectively”—and the policy mechanisms that keep market interest rates within this corridor: Money Market Funds (MMF) and the banks' Reverse Repo Facility (RRP) as the lower limit, the Interest on Reserves Balances (IORB) as the midpoint of emergency funds, and the SRF as the upper limit.

He concluded: “The lower bound of the federal funds rate = RRP < IORB < SRF = the upper bound of the federal funds rate,” and added that the target rate SOFR usually fluctuates within this range. When the trading price of SOFR exceeds the upper bound of the federal funds rate, pressure arises, which he referred to as a “problem,” because once participants are unable to roll over overnight leverage at a stable rate, “the dirty fiat currency financial system will collapse.”

In his view, the cash supply supporting SOFR is structurally much thinner than when the Federal Reserve (FED) began quantitative tightening in early 2022. He noted that money market funds (MMF) have exhausted reverse repos (RRP) because “the Treasury bill rates are extremely attractive,” which has reduced their availability as cash providers for repos. That leaves only the banks, which will provide liquidity as long as they have sufficient reserves, but “since the Federal Reserve (FED) started quantitative tightening, banks' reserves have lost trillions of dollars.”

In stark contrast to the reduction in cash supply, the demand for repurchase financing from RV funds remains robust. If there is a risk of the SOFR rate breaking the upper limit, leading to unreliable repurchase transactions, the Federal Reserve's Standing Repo Facility (SRF) must provide support to the system to prevent financing accidents. Hayes wrote: “The Federal Reserve established the SRF due to a similar situation that occurred in 2019. As long as acceptable collateral is provided, the Federal Reserve can use the printing press of the SRF to provide unlimited cash.”

His conclusion is blunt: “If the SRF balance is above zero, then we know that the Federal Reserve is using money printing to cash out the politicians' checks.” This is the essence of “invisible quantitative easing”: instead of expanding the balance sheet through public asset purchases, it increases liquidity through SRF loans. On the surface, this only provides short-term liquidity support, but in essence, it is similar to the effect of directly printing money to purchase government bonds, both of which increase the supply of dollars in the system.

Why is it called invisible? Dual considerations of politics and technology

Hayes refers to this dynamic as “invisible quantitative easing.” He believes that the practice of directly expanding the balance sheet through asset purchases is politically extremely dangerous—“quantitative easing is a pejorative term… quantitative easing = printing money = inflation”—therefore, central banks are more inclined to meet marginal dollar demand through SRF loans rather than through openly creating excess reserves.

This “invisibility” is reflected in several aspects. First is the obscurity of the naming. SRF sounds like a technical liquidity tool rather than a money printing mechanism, making it difficult for the general public to understand its true impact. Second is the lack of public visibility in its operations. Traditional QE would show the expansion of asset sizes on the Federal Reserve's balance sheet, attracting media attention and public discussion. Although SRF loans will also reflect on the balance sheet, they appear in the form of loans rather than asset holdings, making them less conspicuous.

The third is the temporal dispersion. Traditional QE is usually a large-scale, one-time announced policy, such as “buying 1 trillion dollars of government bonds over the next six months.” SRF, on the other hand, is used on demand, with each instance possibly only a few hundred billion dollars, spread over different points in time, making the cumulative effect difficult to detect. The fourth is the ambiguity of political accountability. Traditional QE is an active decision by the Federal Reserve (FED), which requires taking on the political responsibility for the consequences of inflation. SRF can be described as “being forced to respond to market failures,” which is a passive reaction rather than active stimulation, thereby diminishing political responsibility.

In his view, from a liquidity perspective, the outcome is functionally similar: the repurchase credit issued by the Federal Reserve (FED) against government bonds will still increase the amount of dollars available for government borrowing in the system. “This will buy some time, but ultimately, the exponential growth of government bond issuance will force the government to repeatedly use the last resort mechanism (SRF).” He wrote, “The implicit quantitative easing policy is about to begin. I don't know when it will start. But… as the last resort lender, the balance of the SRF must grow. With the growth of the SRF balance, the amount of legal dollars in the world will also increase, and the price of Bitcoin will rise.”

Government shutdown temporarily withdraws liquidity but is beneficial in the medium term

He also outlined a recent tactical backdrop that helps explain the recent tone of the Crypto Assets market. He pointed out that while the auction activities are bringing funds to the Treasury's general account, fiscal spending is temporarily hindered due to the government shutdown, resulting in a net decrease in private sector Liquidity. He wrote, “The Treasury's general account is about $150 billion above the $850 billion target,” and noted that “this additional Liquidity will not be released into the market until the government reopens,” leading to the “current weakness in the Crypto Assets market.”

In other words, it is the same fiscal engine that ultimately forced the Federal Reserve (FED) to take action through the Standing Repo Facility (SRF) that will also consume liquidity in the short term when issuance exceeds expenditure. This explains the contradictory phenomenon in the current crypto market: the long-term logic is bullish (deficits require printing money for financing), but the short-term prices are falling (government shutdown locks liquidity). Once the government reopens, the locked $150 billion will be released into the market, potentially triggering a rapid rebound in Crypto Assets.

This article is not a prediction of specific timing. Hayes refuses to set a timeline for the turning point—“I don’t know when it will start”—he warns that “careful capital holding is required between now and the start of the implicit quantitative easing policy. Market fluctuations are expected,” especially in the context of pandemic lockdown measures distorting capital flows. But he is unequivocal about the direction after the continuous use of SRF: “The invisible quantitative easing policy is about to start… which will reignite the Bitcoin bull market.”

Practical Insights for Crypto Investors

For cryptocurrency investors accustomed to focusing on CPI data and FOMC dot plots, Arthur Hayes provides a new analytical framework: focusing on the microstructure of the money market. In Hayes' framework, when the SRF balance is no longer a rounding error and begins to show a trend, it indicates that dollar liquidity has quietly shifted—while cryptocurrencies have yet to peak.

The specific monitoring indicators include: the SRF balance in the Federal Reserve's weekly published balance sheet, the position of the SOFR rate relative to the federal funds rate corridor, changes in the Treasury General Account (TGA) balance, and the net increment of government bond issuance and maturity. When the SRF balance starts to rise continuously from zero, it is a signal that invisible QE is being activated. When the SOFR rate frequently touches or exceeds the upper limit, it indicates that pressure in the repo market is increasing, and SRF usage may soon increase.

Hayes's words remain sharp and incisive. He describes U.S. government bonds under the current real yields as “dog shit,” calling buyers “debt shit eaters,” and opens with a hymn praising the characteristics of Bitcoin—“Thanks to Satoshi Nakamoto, the existence of time and compound interest has nothing to do with you.” This provocation precisely highlights the problem: if the marginal financing of the U.S. deficit increasingly relies on the invisible printing of money backed by sovereign guarantees, then holding Bitcoin, which does not rely on any sovereign credit, becomes a rational choice.

He summarized the ultimate result of investment in one sentence: “Government bond issuance = Increase in the money supply = Rise in Bitcoin prices.” For long-term investors, this logical chain provides a solid reason to hold Bitcoin. Even if there are short-term negative factors such as government shutdowns, ETF fund outflows, and technical breakdowns, as long as the structure of the U.S. fiscal deficit remains unchanged and the Federal Reserve must ultimately provide liquidity in some form, the long-term logic for the rise of Bitcoin remains intact.

The current market weakness may be a good opportunity to accumulate positions. When SRF truly begins to be used on a large scale, when the government reopens and releases TGA balances, and when the market realizes that invisible QE has already started, the price of Bitcoin may have already risen significantly. Hayes' framework reminds investors not to be confused by short-term noise, but to focus on the structural factors that determine long-term trends.