Bitcoin Faces Further Downside Risk From Liquidity Squeeze, Though Long-Term Bull Case Remains Strong

Short-Term Pressure Driven by Liquidity, Not Fundamentals

Bitcoin's recent decline is primarily the result of a liquidity-driven squeeze rather than a fundamental breakdown, according to Fabian Dori, Chief Investment Officer at Sygnum Bank. While short-term volatility may persist and prices could test lower levels, Dori maintains that the long-term bullish outlook for digital assets remains intact.

"We can see volatility remaining high in the short term, and prices could even go lower from here," Dori told CoinDesk. "Sentiment has collapsed. Trust and confidence for investors to build exposure are very limited."

Crypto markets have faced mounting pressure in recent months as Bitcoin and other major tokens retreated from earlier highs. Macro headwinds including sticky inflation, shifting Federal Reserve rate cut expectations, and geopolitical tensions have dampened risk appetite across speculative assets.

Extreme Fear Dominates Market Sentiment

The divergence between gold, which has maintained strength, and innovation assets like Nasdaq tech stocks and Bitcoin highlights the fragility of current market conditions. Dori warns against attributing this gap to any single factor, noting that multiple elements have been building over recent months.

Sentiment indicators currently sit at extreme fear levels, leaving markets vulnerable to further downside. Choppy exchange-traded fund (ETF) flows, diminished liquidity, and episodes of leveraged liquidations have amplified price declines, with key support levels being repeatedly tested.

"The ecosystem was already on thin ice because of the cycle dynamics," Dori explained. "Then you add additional liquidity constraints and collapsing sentiment—that's a very vulnerable setup."

Treasury Issuance Drains Market Liquidity

Since June of last year, the U.S. Treasury has substantially increased issuance of bills and notes, significantly raising balances in the Treasury General Account (TGA) at the Federal Reserve. This effectively removes liquidity from markets, leaving it idle in non-productive assets.

"Crypto, being one of the most liquidity-sensitive asset classes, was among the most affected," Dori noted.

A record liquidity event on October 10 further deteriorated risk appetite among investors and market makers, accelerating the decline in crypto market depth. Funding rates collapsed as liquidity conditions worsened.

Since early October, Bitcoin has experienced drawdowns of approximately 40% to 50% from recent highs—declines not seen since the systemic crisis of 2022.

2024 Is Not 2022, Dori Argues

Despite the magnitude of recent losses, Dori firmly rejects comparisons to the 2022 crisis.

"From a macro perspective, regulatory clarity, institutional adoption and counterparty soundness, the picture today is totally different from 2022," he emphasized. "This is not the same systemic risk environment."

Additional concerns including questions around Bitcoin's store-of-value narrative, quantum computing risks, forced selling by digital asset treasuries, and delays in U.S. legislation like the Clarity Act have compounded market uncertainty.

Improving Fundamentals May Accelerate Recovery

Beneath the surface turbulence, Dori identifies several positive indicators. The U.S. business cycle is broadening, with ISM services activity expanding and manufacturing data surprising to the upside—historically prerequisites for improved risk appetite.

Headline inflation remains above the Federal Reserve's 2% target but has moderated sufficiently to allow continued rate cuts in coming months, which would improve liquidity conditions.

From a crypto-native perspective, fundamentals remain constructive. Stablecoin growth continues, integration into traditional finance is expanding, and the number of native tokens locked on networks such as Ethereum and Solana remains robust. Institutional adoption, while uneven, is still progressing.

"Once sentiment normalizes and liquidity conditions improve, the gap between traditional assets and crypto should narrow again," Dori said.

Waiting for a Catalyst

What remains uncertain is the catalyst that will shift sentiment. Passage of comprehensive U.S. crypto legislation like the Clarity Act would be extremely positive, Dori noted. Normalization of geopolitical tensions and continued institutional inflows could also provide meaningful tailwinds.

Treasury-driven liquidity pressures may ease sooner than expected, potentially setting the stage for a faster-than-anticipated market turn ahead of the next Federal Open Market Committee meeting.

"Fundamentally, we see improving business cycle data, stablecoin growth, institutional participation and stronger counterparty risk management," Dori concluded. "That's very different from what we saw in 2022."

Coinasity's Take

Dori's analysis provides a measured perspective during a period of heightened market anxiety. While short-term technicals and sentiment remain challenged, the distinction he draws between liquidity-driven volatility and structural deterioration is crucial for investors. The comparison to 2022 is particularly important—current market conditions lack the counterparty risk and regulatory uncertainty that characterized that crisis. If macro data continues improving and liquidity conditions normalize as Treasury issuance moderates, the recovery could materialize faster than current sentiment suggests. Investors with longer time horizons may find current valuations attractive, though near-term volatility should be expected.