Bitcoin’s Final Leg Down? How the U.S. Liquidity Crunch Is Driving BTC’s Decline — and Why a Rebound May Be Near

• Bitcoin is under pressure amid a liquidity crunch driven by the prolonged U.S. government shutdown.

• Bitcoin has recovered from its dip to $98k, surging to a local high of $103k.

Bitcoin’s Drop is About Dollar Liquidity

Bitcoin’s recent slide has prompted predictable speculation: weak sentiment, technical breakdowns, or trader capitulation. Yet none of these explanations fully capture the broader structural forces at play. The real story is unfolding in the plumbing of the U.S. financial system, where an aggressive liquidity contraction is rippling through markets and dragging Bitcoin down with it.

This tightening is not random. A string of interconnected stresses, including government shutdown constraints and Treasury cash hoarding, has driven up short-term funding costs and drained liquidity at a remarkable pace. Bitcoin, the asset class most sensitive to liquidity shifts, has responded accordingly.

Still, this tightening phase is unlikely to last indefinitely. As in previous liquidity crunches, the pendulum tends to swing back once the Treasury resumes spending and the Federal Reserve moves deeper into an easing cycle. BTC may therefore be tracing the lower edge of its corrective structure, preparing for the next phase of expansion.

Liquidity Tightening Takes Center Stage

The clearest sign of stress lies in the U.S. Treasury General Account (TGA), which has climbed toward $1 trillion. When the TGA rises, the Treasury effectively removes dollars from circulation. Those funds sit idle inside the government’s account at the Federal Reserve, rather than flowing into the economy through spending.

Typically, a rising TGA signals proactive cash management ahead of budget volatility. This time, the motive is the government shutdown, which has paralyzed fiscal operations and halted many payments. To buffer against uncertainty, the Treasury has heavily pre-funded, issuing debt and siphoning liquidity from the private sector. The result is a market-wide dollar shortage.

Short-term funding stress confirms the picture. The spread between the Secured Overnight Financing Rate (SOFR) and the Federal Funds Target Rate has widened to +30 basis points, the highest since March 2020, when COVID-driven liquidity panic hit global markets. A positive SOFR–FDTR spread indicates banks are borrowing at a rate above the Fed’s target, signaling that dollar funding has become scarce.

As the strain deepened, the Federal Reserve was forced to restart overnight repo operations, injecting nearly $30 billion in liquidity on October 31. This is the first such intervention since the 2019 repo crisis, underscoring how seriously the Fed views the current shortfall. Although the scale is smaller than in prior episodes, the signal is clear: funding stress has breached tolerance.

Why Bitcoin Is Under Pressure

Bitcoin is a non-yielding, leverage-sensitive asset. When liquidity tightens, speculators unwind, borrowers deleverage, and capital flees to safer yields. Even as technology stocks climb to new highs, Bitcoin has struggled because liquidity conditions have become structurally restrictive.

Over the past month, as measures of market liquidity slid, BTC became the first major risk asset to weaken. This divergence is consistent with historical dynamics: Bitcoin tends to react earlier and more violently to liquidity cycles than equities.

Two critical dynamics have compounded the stress:

Funding costs are rising.g

As overnight rates push higher, leverage becomes more expensive. This undermines speculative BTC positioning, forcing traders to reduce exposure.

Bank reserves are thinning.g

Although the broad money supply remains high, the marketable liquidity reserves available to banks have fallen. This matters more for risk appetite than aggregate M2. Together, these pressures have weighed on Bitcoin since mid-October, helping to drive its downturn even as other risk assets appear resilient.

The U.S Government Shutdown’s Structural Impact

The current episode is especially disruptive because of the shutdown dynamics. The Treasury pre-funded to hedge against the risk of prolonged closure. Meanwhile, spending has stalled. That combination has driven the TGA to extreme levels without corresponding economic redistribution.

At the same time, many federal functions have frozen. SNAP food assistance has been limited, airport staff operations have been narrowed, and broader public-sector slowdowns are weighing on consumer and business confidence. These strains increase political pressure to end the shutdown.

The Senate now appears poised to pursue a compromise ahead of the November 15 recess. If that deadline is met, spending would resume shortly afterward, pushing TGA balances lower and restoring liquidity.

Every historical instance of TGA hoarding driven by shutdowns has ended with a relief phase in markets once spending recommenced. Bitcoin has responded strongly to these liquidity inflections.

The Fed’s Quiet Policy Pivot

The resumption of overnight repo injections marks a shift from outright balance-sheet reduction toward tactical liquidity management. In practical terms, the Fed is acknowledging market stress and stepping in before conditions deteriorate further.

While the intervention is not yet large enough to call it a pivot, its symbolic weight is significant. If repo injections continue to rise, the effect becomes quasi-QE, an unspoken easing that supports funding markets and risk appetite.

This presents a critical threshold: if liquidity injections continue and the TGA begins to fall as the government reopens, then both major drains on liquidity will reverse simultaneously. That would create the conditions for a broad market rebound, with Bitcoin likely leading the way.

Where Bitcoin Goes Next

Despite the gloom, the liquidity cycle is not linear. Once TGA spending resumes and the Fed’s policy cadence softens, liquidity should improve. Institutional forecasts, including estimates from Goldman Sachs, project reopening in the November 10–15 window.

If that timeline holds, Bitcoin could be tracing its final leg downward into the reopening window. In previous cycles, comparable liquidity contractions marked mid-cycle corrections rather than terminal peaks. As liquidity returned, Bitcoin became the first major risk asset to recover and often outperformed other risk assets.

Conclusion

Bitcoin’s decline is far less emotional than it appears. The market is not reacting to fear or loss of faith, but to a mechanical, temporary tightening of U.S. dollar liquidity. A massive Treasury cash hoard, shutdown-driven spending freezes, and short-term funding stress have combined to restrict reserves and weigh on risk assets.

The Federal Reserve’s emergency repo operations suggest that the worst of the liquidity squeeze is visible and perhaps nearing exhaustion. As the government prepares to reopen, TGA balances are likely to fall, spending will resume, and liquidity should re-enter markets. If history is a guide, such a shift would mark the beginning of a new liquidity phase, potentially placing Bitcoin on the cusp of recovery.