Market Pressure Intensifies
Bitcoin dropped about 2% in recent trading, falling to around $108,800. This decline essentially wiped out most of the recovery from last Friday’s sharp selloff. The broader crypto market showed even steeper losses, with Ethereum, XRP, and Solana all down roughly 3% over the same period.
Meanwhile, precious metals continued their strong performance. Gold gained another 2% to reach a new record near $4,300 per ounce, while silver advanced 3.6% to also set a fresh high. The divergence between crypto assets and traditional safe havens has become quite noticeable lately.
Liquidity Conditions Worsen
The main culprit behind crypto’s struggles appears to be tightening liquidity in financial markets. The spread between the secured overnight financing rate (SOFR) and the effective federal funds rate (EFFR) has widened significantly, jumping from 0.02 to 0.19 in just one week. This marks the highest level since December 2024.
SOFR represents the cost of borrowing cash overnight using Treasury securities as collateral, while EFFR reflects unsecured interbank lending rates. When SOFR rises above EFFR, it suggests lenders are demanding higher returns even for secured borrowing, indicating tighter liquidity conditions.
Funding Stress Indicators
Other signs of funding pressure have emerged as well. Banks recently drew $6.75 billion from the standing repo facility, the highest amount since the pandemic period excluding quarter-end dates. The SRF, established in 2021, serves as a liquidity backstop during funding shortages by providing overnight loans against Treasury collateral.
While the current SOFR-EFFR spread remains well below the 2.95 peak seen during the 2019 repo crisis, the recent spike suggests borrowing costs are rising. This development particularly affects Bitcoin, which many investors view as highly sensitive to liquidity conditions.
Market Sentiment and Outlook
The tightening liquidity environment seems to be cooling investor risk appetite across financial markets. Some crypto traders are hoping central banks might intervene to ease the pressure, potentially reigniting Bitcoin’s upward momentum. Whether that scenario plays out remains uncertain, but for now, the liquidity squeeze appears to be the dominant factor driving crypto prices lower.
The situation highlights how interconnected crypto markets have become with traditional finance. When liquidity tightens in the broader financial system, digital assets often feel the impact quite directly. It’s a reminder that despite crypto’s reputation for independence, it still operates within the context of global financial conditions.
