BitcoinMarkets
|7 min ReadBitcoin slides as shutdown drains liquidity at cycle end
Carter Hayes
Senior Analyst
Published
Jan 16, 2026
FAQ
What is driving Bitcoin’s current 20 percent drawdown?
A mix of slower US spot Bitcoin ETF inflows, whale distribution to new long-horizon holders, weaker funding rates, the October 10 futures liquidation, and Bitcoin trading below the 200-day moving average. These signals point to softer risk appetite and tighter liquidity.
How does the US government shutdown and the Treasury General Account (TGA) impact crypto liquidity?
The shutdown helped push the TGA near $1 trillion, which drains cash from markets, lowers bank reserves, lifts repo and SOFR rates, and pressures risk assets like Bitcoin. Lower reserves often correlate with weaker Bitcoin performance.
What could trigger the next rebound in Bitcoin price?
A government reopening and TGA drawdown would return liquidity to markets. Watch spot Bitcoin ETF net inflows, changes in bank reserves, and whether BTC reclaims the 200-day moving average.
The cycle story meets a tougher market
Citi says the mass liquidation on the tenth hurt risk appetite. Spot ETF inflows slowed in recent weeks. On chain, whales are thinning out while small wallets are growing. Funding rates slipped, telling you leverage demand is weak. Price now sits below the 200-day moving average, a level that often cools demand. Citi still calls this an early adoption phase for advisors and mainstream investors, but says spot ETF flows are the key gauge for sentiment.
Bitcoin is in a deep pullback. From the early-month peak, price fell about 20 percent. It comes at the tail end of the famous four-year cycle. A prolonged US government shutdown tightened liquidity and made the slide nastier and longer.
The four-year rhythm starts with the halving. Roughly every 210,000 blocks, miner rewards are cut, new supply falls, and a predictable supply shock hits. Historically, months after each halving, price topped and then a bear phase followed. This time, the fourth halving already happened, rewards dropped from 6.25 to 3.125 BTC. Several research desks argue the market is maturing. With institutions stepping in and spot ETFs opening new demand channels, price action may not obey the old script so strictly. Supply cuts matter less as almost all coins are already mined. Issuance moved from around 1.7 percent to roughly 0.85 percent, a small slice of a big pie. Pricing now leans more on flows from institutions and long holders, not fresh supply.
Whales distribute, new hands accumulate
Citi’s latest note points to the core driver. Whale cohorts are shrinking while small holders add. It fits the late-cycle playbook. Smart money sells to the newcomers. Since August, whales sold about 147,000 BTC, worth roughly 16 billion dollars. Addresses with more than 1,000 BTC declined. Sub-1 BTC wallets rose. Glassnode’s breakdown shows entities with more than 10,000 BTC are in clear distribution. The 1,000 to 10,000 cohort is broadly neutral. Net buying comes from smaller, allocation-driven investors who tend to hold longer.
There is logic here. Long-term holders are largely in profit. They are taking gains, big and beautiful. Bitwise’s André Dragosch says many whales trust the halving cycle and expect the peak is in. CryptoQuant’s Ki Young Ju adds that this time looks different. It is not whales to retail. It is older whales handing chips to new long-horizon holders, including institutions, ETFs, and allocators. Selling pressure stays, but buyers are sturdier. That can make the drawdown milder yet longer.
Shutdown turns the TGA into a vacuum
Another catalyst is simple. The US shutdown drained liquidity. The Treasury General Account ballooned and sucked cash out of markets. Risk assets felt it fast. Bitcoin felt it first.
By late month, the TGA crossed 1 trillion dollars, the highest in almost five years. It jumped from roughly 300 billion to 1 trillion in a few months, a 700 billion dollar liquidity pull. Two engines drove it. During the shutdown, the Treasury kept taking in taxes and issuing bills, but with no budget authority to spend, the account filled up. At the same time, heavy Treasury issuance continued, which also drains liquidity even in normal times.
The effects were broad. Foreign commercial banks’ cash assets dropped to about 1.176 trillion dollars from the summer peak. Federal Reserve reserves slipped to 2.8 trillion, the lowest since early 2021. Money markets tightened. The top end of overnight repo printed 4.27 percent, above the interest on reserve balances near 3.9 percent and the fed funds target range of 3.75 to 4.00 percent. SOFR moved higher too. Citi stresses crypto is highly sensitive to bank reserve swings. Weekly bitcoin returns tend to track reserve changes. Falling reserves line up with weak bitcoin. The shutdown acted like multiple stealth rate hikes. The 700 billion dollar drain was a powerful tightening. The Fed ended QT at its latest meeting, which likely reflects the stress. The change starts in December.
The liquidation shock and ETF chill
Citi also flags a sharp futures wipeout on the tenth that dented risk appetite. Futures are a zero-sum arena, but this round likely bruised native crypto traders’ risk capacity and cooled potential ETF buyers.
Funding rates fell, showing soft demand for leverage and fragile mood.
US spot bitcoin ETF inflows slowed sharply in recent weeks. That surprised many who thought ETF flows would be insulated from futures and DEX liquidations. Ether ETFs cooled as well.
Technicals add weight. Price sits below the 200-day. Simple moving-average rules have helped manage bitcoin exposure over the past decade. The signal matters.
The pivot to watch: government reopens and cash returns
There is a silver lining. The same shutdown that drained liquidity can unleash it when government reopens. The Treasury would start spending down the swollen TGA, pouring hundreds of billions back into the system. Some on Wall Street expected a mid-month resolution, with pressure points like air traffic control and airport security pay forcing movement, much like the prior episode that ended after similar disruptions. Prediction markets saw roughly even odds of a restart by mid-month and low odds of dragging beyond the holiday period.
If Washington flips the switch, pent-up liquidity can chase risk. It would look like stealth QE. We have seen this movie. A rapid TGA drawdown once fueled a powerful equity rally. A year-end reopening plus a big TGA release could ignite bitcoin, small caps, and most non-AI cyclicals. The worse the crunch now, the bigger the reservoir later. With the TGA near 1 trillion dollars, the eventual release could be tremendous. That rush of cash is a real catalyst for a strong rebound in bitcoin and other risk assets.
Disclaimer: This document is intended for informational and entertainment purposes only. The views expressed in this document are not, and should not be taken as, investment advice or recommendations. Recipients should do their own due diligence, taking into account their specific financial circumstances, investment objectives and risk tolerance, which are not considered here, before investing. This document is not an offer, or the solicitation of an offer, to buy or sell any of the assets mentioned.