Core Strategy: Remaining Tactically Cautious, TGA Rundown + Early Jan Flows Could Produce Needed Spark

In our view, this cycle is far from over. However, until bonds find a bottom and the USD peaks, it’s prudent for more tactically-minded crypto investors to remain nimble and ready to capitalize on opportunities once a trend reversal is confirmed. While this could happen as early as next week due to early-January inflows, additional patience may be required until the next round of significant macro data is released and the TGA rundown begins.

Trickle-Down Economics

Last week, we discussed the massive wealth creation from several airdrops in the crypto space over the past month. Billions of dollars have been distributed to crypto market participants through airdrops like PENGU, ME, and most notably, HYPE. HYPE, the native token of Hyperliquid—a decentralized perps exchange built on its own layer 1 network—is used for staking and fees. At current prices, the HYPE airdrop is valued at $7.2 billion.

It is difficult to determine exactly how much of this value has been retained by initial recipients versus how much has been captured by later entrants. Regardless, marginal buyers have driven Hyperliquid’s market cap to levels that have likely left many investors far better capitalized than they were prior to the airdrop on 11/29.

We noted last week that, as a result of this wealth creation, other assets would likely benefit from capital flows into the broader crypto ecosystem. Typically, after an airdrop, funds flow into the native token of the underlying chain where the airdropped token resides (e.g., JTO airdrop recipients taking profits into SOL). However, in HYPE’s case, HYPE is the native token of Hyperliquid, and the chain currently has no significant ecosystem of applications for this wealth to trickle into.

Fast forward to today, we are seeing early signs of profit-taking on Hyperliquid. Net flows into Hyperliquid via the Hyperliquid bridge appear to have peaked, at least for now. Over the past couple of weeks, there have even been days of net outflows from Hyperliquid.

Some of these outflows can be attributed to recent concerns over potential security vulnerabilities on the Hyperliquid network. While this note does not aim to evaluate the security of the Hyperliquid bridge, this context may explain some of the profit-taking and migration away from the network.

It’s important to note that net flows alone provide an incomplete picture of profit-taking, as inflows may remain strong even amidst broader selloffs by recipients of the HYPE airdrop. Thus, we should look to pure outflows to gain better insight.

Outflows began increasing around 12/16 and broadly continued through the mass exodus on 12/23, offering some confidence that HYPE token holders are realizing profits and moving funds elsewhere.

Flow data into and out of Arbitrum further validates this observation. Arbitrum has experienced $770 million in outflows over the past 14 days. At first glance, this may seem like a negative signal for Arbitrum, but it is actually a consequence of users bridging to Hyperliquid via Arbitrum. As bullish sentiment around Hyperliquid diminishes, we should see capital migration from Arbitrum in tandem with net outflows from the Hyperliquid bridge.

Assuming the above is accurate—that wealth from the HYPE airdrop is being converted to USDC and migrating away from Hyperliquid—we can infer where some of this capital is flowing.

It appears that three major beneficiaries are Base, Solana, and, to a lesser extent, SUI. ETH has also seen substantial inflows, though Ethereum often serves as a temporary stop for capital before moving elsewhere, so we place less emphasis on the signal from ETH flows.

A notable coincident indicator of this capital migration is the SOL/BTC ratio bottoming around the same time as the HYPE token reached a local top on 12/21.

We view HYPE airdrop recipients as a good proxy for sophisticated crypto-native capital. Observing where these profits are migrating provides valuable insights into potential areas of focus heading into next year.

While this is just one data point among many, we consider it a material indicator worth noting.

Debt Ceiling Disagreement Could Be a Tailwind for Crypto

Last Friday, Congress voted to keep the government funded through March. At that point, they will need to come together to pass a longer-term spending package—or potentially kick the can down the road once again.

What’s particularly relevant to crypto in this stopgap funding bill is the omission of the debt ceiling. President-Elect Trump had pushed to include a provision removing the debt ceiling (effectively eliminating the limit on the amount of debt the U.S. Treasury can issue), but this effort was opposed by all House Democrats and 38 House Republicans.

The debt ceiling’s omission matters for crypto because, on January 2nd, when the current ceiling is reached, the Treasury will likely have to rely on its “extraordinary measures” playbook. This means tapping into its Treasury General Account (TGA), a reserve account held at the Federal Reserve. The TGA serves as a kind of rainy-day fund, used to meet obligations when new debt issuance is temporarily off the table—though it is utilized more frequently than its original design intended.

This is a potential tailwind for capital markets because, in simple terms, drawing down the TGA represents a flow of funds from the public sector to the private sector. While other factors—such as the risk appetite of market participants, banks’ willingness to lend against increased reserves, and broader macro conditions—also play a role, this dynamic generally improves liquidity conditions. That, in turn, benefits liquidity-sensitive assets like crypto.

A look back at 2023 supports this view. The last debt ceiling standoff likely contributed to Bitcoin’s recovery from $15,000–$17,000 to $24,000 in Q1. While other factors were undoubtedly at play, the drawdown of the TGA appears to have been a significant driver of improved risk sentiment and asset performance during that period.

As we approach January, it’s worth keeping this dynamic in mind. The combination of this potential liquidity tailwind and typical beginning-of-year flows could create a favorable setup for crypto markets.

Tactical Patience Still Required

A little over a week ago, we turned tactically cautious post-FOMC for several reasons:

• The DXY was showing few signs of relenting, sitting above 108
• The U.S. 10-year Treasury yield continued its march higher, exceeding 4.5%, which is generally unfavorable for rate-sensitive assets
• Pace of USD inflows (ETF inflows and stablecoin creations) were rolling over
• The majors (BTC, ETH, and SOL) were all trading at a discount on Coinbase, indicating that U.S. investor demand was lagging global demand—a bearish signal since bullish trends rarely sustain without U.S. participation

Fast forward to today, and there are still no convincing signs that these factors are reversing course. See charts below.

DXY above 108:

US 10Y now >4.6%:

USD Flows Turn Negative:

Majors Trading at a Discount on Coinbase:

For this reason, we continue to believe it’s prudent to maintain some dry powder in case the persistent selloff in bonds and weakening market liquidity into year-end triggers a further market reaction.

To be clear, we remain cyclically bullish, but for tactically minded investors, it’s sensible to stay on the defensive until a couple of these factors start to improve.

This improvement could come as early as next week, driven by the combination of the debt ceiling being reached and first-week inflows entering the market. However, a clearer picture may not emerge until the week of January 6th, when the next round of material economic data is released that could help stem the selloff in bonds/strength in the dollar.

Tickers in this report: BTC 1.48% , HYPE, PENGU 3.96% , ME 5.22% , SUI 9.10% , SOL 2.81% , ETH 3.52% , HNT 6.83% , STX -1.83% , MKR, BNB, CORE, JTO 1.70% , BONK -0.41% , RAY 10.06% , MSTR -0.17% , SMLR 0.13% , COIN 3.04% , HOOD 3.45% , MARA 4.40% , RIOT 6.86% , WGMI 6.33% , CLSK 6.24% , WULF 6.77% , IREN 5.21% , CORZ 7.85% , BTDR 8.06% , BTBT 6.55% , HUT 7.67% , HIVE 6.97% , AVAX 3.10% , XRP 1.32% , GDLC, BITW 1.74% , OP -0.15% , MKR