Watching the Fed's balance sheet and calling it "liquidity" is where a lot of macro traders go wrong. The balance sheet is the biggest number, sure, but it isn't the money that actually reaches markets. A couple of accounts sit in between and quietly pull cash out of the system, and if you ignore them you end up with a picture that looks bullish when conditions are actually tightening. Net liquidity is the number that corrects for that.
The formula
Net liquidity is the Fed balance sheet minus the Treasury General Account minus the Reverse Repo Facility. Three moving parts, each doing its own thing.
The balance sheet is the total assets the Fed holds, mostly government bonds it bought through QE. When it grows, the Fed is adding liquidity. When it shrinks under QT, liquidity is coming out.
The TGA is basically the government's checking account at the Fed. When the Treasury piles up cash there, by issuing bonds or collecting taxes, that money leaves the financial system and sits idle. When the Treasury spends out of the TGA, the cash flows back in. The big swings tend to cluster around tax deadlines and debt-ceiling episodes, and they move fast enough that you'd never see them if you were only watching the headline balance sheet.
The RRP is where money market funds and other institutions park spare cash overnight at the Fed. Anything sitting in the RRP is effectively out of the market, because it's earning a rate at the Fed instead of getting deployed. Back through 2022 and 2023 the RRP ran over $2 trillion, so a huge pile of potential liquidity was just sidelined.
Why net liquidity tracks asset prices
Net liquidity has tracked risk assets more closely than any of its individual pieces, and the reason is pretty mechanical. The balance sheet tells you how much liquidity got created. The TGA and RRP tell you how much of it is currently being drained back out. Subtract the drains and you're left with what can actually flow into assets.
Bitcoin's relationship with net liquidity has been especially tight since 2020, usually with a lag of about one to three weeks. When net liquidity climbs, whether that's the balance sheet growing, the TGA falling, or the RRP falling, Bitcoin tends to grind higher a short while later. When net liquidity drops, Bitcoin tends to follow it down. It's not a stopwatch, but the direction has been reliable enough to pay attention to.
TGA and RRP are the swing factors
The balance sheet itself moves slowly. QE and QT happen at a steady, telegraphed pace, so on any given week it's not what shifts the number. The action is in the TGA and the RRP, which can move by hundreds of billions of dollars in a matter of weeks.
- The TGA tends to spike around tax dates like April 15, June 15, September 15, and January 15, as revenue floods in and temporarily drains the system. It falls when the Treasury spends, which often happens after a debt-ceiling standoff resolves and the Treasury rebuilds and then draws down its cash.
- The RRP has been in a structural decline since late 2022, as money funds rotated out of overnight repo and into Treasury bills paying a similar yield. That drain has actually been a tailwind for liquidity, partly offsetting the Fed's QT the whole time.
Put those two together and you get most of the week-to-week movement in net liquidity. That's why I care more about where the TGA and RRP are headed than about the next QT print, which I can basically predict already.
Using it in practice
I calculate net liquidity weekly off the Fed's own data. The balance sheet and RRP update daily, and the TGA comes through the daily Treasury statement, so everything you need is public and current. Then I track the four-week rate of change rather than the raw level. When net liquidity is rising and the pace is picking up, that's about as friendly a backdrop for risk assets as you get. When it's falling and accelerating lower, conditions are getting worse whether or not price has caught on yet.
One thing worth being honest about: this framework won't hand you a price target. It doesn't tell you Bitcoin is going to $X. What it does is set the weather. A clean technical setup in a draining-liquidity environment is fighting the tide, and the same setup with liquidity rising has the wind at its back. At Blockcircle we treat net liquidity as one input into the regime read, sitting alongside the wallet flows and filings and prediction-market signals, and we let it push conviction and position size up or down rather than firing trades on its own. Use it the same way. It's a lens for sizing your bets, not a buy button.