Government Shutdown Drains Market Liquidity

The longest US government shutdown in history has entered its sixth week, creating significant economic strain. More than a million government employees aren’t being paid, some welfare payments have halted, and air travel faces disruptions due to air-traffic shortages. The Congressional Budget Office estimates losses between $7 billion and $14 billion, with fourth-quarter GDP growth likely trimmed by up to two percentage points.

What’s happening here, I think, is that the fiscal gridlock has frozen hundreds of billions of dollars inside the Treasury General Account. Every dollar parked there isn’t circulating in the financial system. Since the debt ceiling was raised in July, the TGA balance has swelled above $850 billion, draining liquidity by about 8%. Bitcoin mirrored this move, sliding roughly 5% in the same period.

The Liquidity Connection to Crypto

This correlation isn’t new – on-chain analysts have long observed crypto’s sensitivity to dollar liquidity. Arthur Hayes describes this dynamic as a “stealth QE in reverse.” When the Treasury hoards cash, liquidity tightens, risk assets fall, and Bitcoin corrects. It’s a pretty straightforward relationship when you think about it.

But here’s the interesting part: once the government reopens and resumes spending, that liquidity should flood back through banks, money markets, and stablecoin systems. This effectively reverses the drain we’ve been seeing. The mechanism that pulled liquidity out will likely push it back in.

Market Recovery Prospects

The short answer to whether crypto will rebound is probably yes. Crypto, and Bitcoin specifically, trades as a liquidity-sensitive risk asset. When dollar liquidity tightens, prices fall; when liquidity expands, they tend to rise. This pattern has repeated across multiple cycles.

Bitcoin has maintained above $100,000 for six consecutive months, and the RSI remains around 46, which is far below euphoric levels. Some analysts call the current phase a “window of pain” driven by temporary fiscal tightening rather than fading enthusiasm for the technology itself.

Looking Ahead

The broader picture suggests conditions could support Bitcoin recovering toward the $110,000–$115,000 range in the next quarter, assuming no new shocks emerge. Once the government reopens, Treasury spending and Federal Reserve support mechanisms like the Standing Repo Facility should reintroduce cash into the system.

The general thinking is that crypto fell because dollars stopped moving. It will likely rise when they start flowing again. In practical terms, the end of the shutdown could mark the beginning of a liquidity-driven rebound across crypto markets. The timing and magnitude will depend on how quickly liquidity returns to the system, but the underlying mechanics seem to favor recovery.