In a story that’s becoming too familiar to crypto bulls, prices are sliding sharply on Thursday even as gold and silver once gain notch new record highs.
Bitcoin BTC$110,901.10 has tumbled about 2% over the past hour to $108,800, now mostly having given up its bounce from the Friday crash. The action across the rest of crypto shows even steeper declines, with ether ETH$4,007.20, XRP$2.4115 and solana SOL$192.94 among those sporting roughly 3% dips over the last sixty minutes.
Precious metals, however, continue to be extremely well bid, with gold higher by another 2% to a new record just below $4,300 per ounce. Silver is ahead 3.6% and also at a new record.
What gives?
Wondering what’s keeping bitcoin BTC$110,901.10 and other major tokens under pressure after last week’s much-needed flush out of excess leverage?
The likely catalyst is the tightening liquidity in the financial system, which seems to be tempering investor risk appetite.
The ongoing tightening is evident from the spread between secured overnight financing rate (SOFR) and the effective federal funds rate (EFFR), which has risen to 0.19 from 0.02 in one week, reaching the highest since December 2024, according to data source TradingView.
SOFR represents the cost of borrowing cash overnight using U.S. Treasury securities as collateral in the repo market. The borrowers are typically banks, broker-dealers, asset managers, money market funds, and insurance companies. SOFR is considered almost risk-free, secured rate based on actual transaction data.
Meanwhile, EFFR indicates the weighted average interest rate at which banks lend excess reserves to other banks overnight in the federal funds market. It is an uncollateralized, unsecured interbank lending rate, influenced primarily by the Federal Reserve’s monetary policy.
When the SOFR rises above the EFFR, it indicates that lenders are demanding a higher return even for secured borrowing backed by U.S. Treasury securities. This situation signals tight liquidity conditions and makes borrowing more expensive in the short term.
The latest spike in the spread could be capping gains in BTC, which is considered a pure liquidity play by many.
Note that the spread is still considerably lower than the high of 2.95 observed during the repo crisis of 2019.
That said, other signs of funding stress are present, too. For instance, on Wednesday, banks drew $6.75 billion from the standing repo facility (SRF), the highest amount since the end of the coronavirus pandemic, excluding quarter-end periods.
The SRF, introduced in 2021, provides a liquidity backstop during potential funding shortfalls by extending twice-daily overnight cash loans against U.S. Treasuries.
All these signs of tightening liquidity have sparked hope across crypto social media that central banks might soon step in to ease the pressure, potentially recharging BTC bulls’ engines for a fresh rally to new highs. Whether that plays out as the bulls expect remains to be seen.