BitcoinMarketsRegulation
|7 min ReadTraders Split as Bitcoin Faces Political and Liquidity Crosswinds
Maya Chen
Senior Analyst
Published
Jan 16, 2026
Bitcoin keeps sliding. The market keeps shaking. After the violent 10.11 crash and weeks of fear around a U.S. government shutdown, traders are fighting over what happens next. Liquidity rules everything in crypto. When dollars flow, Bitcoin rises. When dollars tighten, Bitcoin breaks. The record shutdown locked liquidity inside the Treasury’s accounts and pushed global markets into stress. Bitcoin did not escape. Politics now drives the liquidity cycle more than anything else, and every move from Washington shifts expectations again.
Bears Point to Politics, Rates and a Broken Cycle
Bears see a political tide turning against crypto. Analysts argue that recent Democratic victories in state elections hit Republican momentum and sent a warning to the Trump administration. Losses in Virginia, New Jersey, New York and other key races stunned Republicans.
Gavin Newsom remains the frontrunner on Polymarket for the 2028 Democratic nomination. New York’s Zohran Mamdani became the city’s youngest mayor with strong support from young voters who previously leaned toward Trump. These results act as early signals for the 2026 midterms. If Democrats take back the House and Senate next year, Trump’s policy room narrows fast. Even now, internal divisions in the Republican Party have limited the White House’s ability to control the agenda.
The historic shutdown displayed those limits. Republicans demanded Democratic votes to reopen government. Democrats blocked them 14 times. GOP Senate leaders refused to scrap the 60-vote filibuster threshold. Trump was forced to accept a compromise that included Democratic priorities. The shutdown lasted long enough to trigger real economic pain and public anger.
Food inflation adds more pressure. Beef, coffee, gas, electricity and repair costs have jumped double digits. Middle-class Americans feel squeezed and anxious. These conditions helped Democrats win local races and could shift national sentiment.
Bears also point to the Federal Reserve. The probability of a December rate cut has fallen sharply, from around 90 percent to near 51 percent on Polymarket. Several voting Fed presidents have argued against easing next month, citing tariff-driven cost pressures, employment uncertainty and doubts about whether rates remain restrictive.
Powell tried to settle these debates with a dovish message at Jackson Hole. Later data showed hiring had stalled, supporting his view. But by late October, hawks resurfaced. Kansas City Fed President Jeff Schmid opposed another cut. Other regional chiefs backed him. Powell then admitted that December is not guaranteed.
Analyst Willy Woo argues that the old “dual four-year cycle” has broken. Bitcoin once surged when its halving cycle aligned with global liquidity expansion. Now these cycles have decoupled. Bitcoin has never lived through a true recession. If the economy turns down, Woo believes the top may already be in. Galaxy Digital lowered its year-end target from 120,000, citing selling from whales, capital rotation to gold and AI, and a wave of leverage unwinds.
Bulls Bet on Liquidity Rebound, Regulation Tailwinds and Political Shifts
Not everyone agrees. Real Vision CEO Raoul Pal says the market is close to a major reversal. The shutdown starved liquidity and pushed the Treasury General Account toward $1 trillion.
Pal argues that this pain signals a turning point. The Federal Reserve was forced to restart overnight repos worth nearly 250 to $350 billion in the following months. That injection alone would lift risk assets. Pal also claims the Bitcoin cycle is extending to five years, placing the next peak around the second quarter of 2026.
BitMEX founder Arthur Hayes shares this view. He links Bitcoin’s drop to an 8 percent decline in dollar liquidity since July. Once the Treasury begins spending again, he expects liquidity to rebound. He believes the market is misreading the situation and that a fresh rally will start when “stealth QE” returns.
JPMorgan analysts also project Bitcoin could reach $170,000 in the next 6 to 12 months as leverage resets and technical conditions improve.
Regulation adds another bullish angle. The CLARITY Act is advancing quickly through Congress. It cleared the House with support from 78 Democrats and now sits in the Senate Agriculture Committee under a bipartisan process. The bill shifts primary oversight of spot digital commodities to the CFTC and limits the SEC’s reach. Stablecoin regulation is split cleanly between trading rules and issuance rules, reducing conflicts. The White House wants legislation finalized by year end.
Powell’s own term ends on May 15, 2026. Trump’s preferred successor, Kevin Hassett, is a strong dove and a loud critic of past rate hikes. Polymarket shows him as the leading candidate. A shift toward dovish leadership could accelerate rate cuts in 2026.
A surprising political twist also adds momentum. Trump has begun repairing his relationship with Elon Musk. He re-nominated Musk ally Jared Isaacman as NASA administrator on November 4. Musk reposted the announcement, signaling a thaw. The two were photographed together in September, speaking privately at a memorial event. With ties improving, Republican fundraising and business alignment may strengthen going into the 2026 race.
Markets Face a Battle of Liquidity, Regulation and Macro Reality
After reviewing both sides, three ideas stand out. Short term, liquidity dominates. Shutdown fallout, political uncertainty and tight funding conditions support Galaxy’s cautious 170,000 view. Long term, macro cycles decide everything. If Pal is right and the peak shifts to 2026, the current drawdown may be positioning fuel.
Political risk is real but often overstated. Democratic victories signal danger for Republicans, yet regulatory progress already has bipartisan support. Once a framework is in place, it rarely reverses quickly. The bigger danger is uncertainty itself. Markets prefer clarity. A long stretch of political ambiguity could weigh more heavily than any single outcome in 2026.
The deepest risk is recession. Bitcoin has never lived through one. If the United States enters a downturn, no one knows whether Bitcoin behaves like a tech stock or like digital gold. Weak hiring, soft consumption and tight household budgets show real stress building. If these trends continue, liquidity injections and regulatory wins may not be enough to hold the market up.
The next few months revolve around one question: when does liquidity return? Government spending, rate decisions, legislative timelines and midterm momentum all feed into that answer. Traders will keep arguing. Charts will keep swinging. But one truth stands tall.
In this market, uncertainty remains the only constant.
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.