Bitcoin Faces Massive $1 Trillion Shock: Liquidity Crunch Deepens

• Bitcoin’s recent drop is linked to a U.S. dollar liquidity crunch instead of market sentiment.
• The Treasury’s $1 trillion cash pile has removed liquidity from financial markets.
• If government spending resumes, liquidity could return and set the stage for Bitcoin’s rebound.

The drop in Bitcoin did not occur out of sentiment or sentimentality. It occurred due to metrics. While traders may seek trends or sentiment, the truth is in the United States government’s balance sheet. The dollar system is contracting.

There is cash that is sitting idle in the Treasury General Account, almost $1 Trillion dollars. That leaves the dollar that is not in the market or moving about in any capacity and when cash is idle the continuing effect on assets is lower prices for many.

The pre-funding the U.S. Treasury undertook in advance of the government shutdown has made the country cash starved. The result; Increased short-term rates, spread widening, and the resurrection of an old ghost, the Federal Reserve’s overnight repo operations.

Also Read: Bitcoin Enters Bear Territory With Price Falling Over 20% From ATH

Bitcoin and the Liquidity Vacuum

The Fed pumped roughly $30 Billion to prop up the ship for the first time since 2019. That indicates something, liquidity is no longer a quiet concern but now a structural problem.

Bitcoin, being the most laddered asset to liquidity has been the first to feel the trickle wearing thin. Bitcoin’s recent performance is consistent with the underlying increase in the cost of dollars to borrow or raise in the repo markets. The spread between SOFR and FDTR is 30 basis points indicating some systemic stress.

Bitcoin’s Final Leg Before the Turn

Winters never last forever. History suggests that, when liquidity is tightening this quickly, a reversal is never too far behind. The longer the U.S. government remains closed, the more pressure builds on Wall Street and Main Street. Airport lines explode. Federal workers are standing in limbo. Confidence is shaken. Small cracks can lead to big compromises.

By mid-November, the Senate is expected to be moving a deal to reopen the government. Once that deal goes through, the Treasury will start spending, the TGA balance will decrease, and liquidity will come back into the market. Risk assets, which are always the first to go down in tight liquidity situations, are likewise the first to rebound.

Source: Wu Blockchain

Consequently, Bitcoin may be near its “final leg down.” As fiscal taps open and the Fed then moves to rate cuts, a new liquidity cycle will begin. Money will then begin flowing, and Bitcoin, which has closely traced the flows of money throughout its life, will begin to ride that next wave, leaner, sharper, and ready to mark its next climb.

Also Read: Strategy Will Keep Bitcoin Safe Without Selling During Next Market Crash