Market Pressure Intensifies
Bitcoin dropped about 2% in recent trading, falling to around $108,800. This decline mostly erased the recovery from last Friday’s market crash. Other major cryptocurrencies showed even steeper losses during the same period. Ethereum, XRP, and Solana all dropped roughly 3% over the past hour.
Meanwhile, precious metals continued their strong performance. Gold reached another record high, climbing 2% to just under $4,300 per ounce. Silver also hit new records with a 3.6% gain. The divergence between crypto assets and traditional safe havens has become quite noticeable in recent sessions.
Liquidity Squeeze Emerges
The primary driver behind crypto’s struggles appears to be tightening liquidity in the financial system. This is making investors more cautious about riskier assets. The evidence comes from the spread between secured overnight financing rate (SOFR) and the effective federal funds rate (EFFR).
This spread has widened significantly, jumping from 0.02 to 0.19 in just one week. That’s the highest level since December 2024. When SOFR rises above EFFR, it suggests lenders want higher returns even for secured borrowing backed by U.S. Treasury securities. This typically signals tighter liquidity conditions and makes short-term borrowing more expensive.
Understanding the Rates
SOFR represents the cost of borrowing cash overnight using Treasury securities as collateral in the repo market. Banks, broker-dealers, and asset managers typically use this market. It’s considered almost risk-free because it’s secured by actual Treasury collateral.
EFFR shows the weighted average interest rate for banks lending excess reserves to other banks overnight. This is unsecured interbank lending, directly influenced by Federal Reserve policy. The widening gap between these rates tells us something important about current market conditions.
Additional Stress Signals
Other indicators point to funding pressures too. On Wednesday, banks drew $6.75 billion from the standing repo facility. That’s the highest amount since the pandemic period ended, excluding quarter-end periods. The SRF provides emergency liquidity during funding shortfalls by offering overnight cash loans against Treasury collateral.
While the current spread of 0.19 remains well below the 2.95 peak during the 2019 repo crisis, it still represents a meaningful tightening. For Bitcoin, which many view as a pure liquidity play, this environment creates headwinds.
Some crypto enthusiasts hope central banks might intervene to ease the pressure. Whether that happens—and whether it would actually boost crypto prices—remains uncertain. For now, the liquidity squeeze appears to be the dominant factor influencing market sentiment across digital assets.
