The Caladan Weekly | Liquidity: The Primary Driver of Crypto Markets

Why Bitcoin’s Crash From $126K to $90K Proves the Liquidity Thesis

The cryptocurrency market’s dramatic 27% collapse from Bitcoin’s October peak to a seven-month low validates what institutional observers have quietly understood: liquidity, not narratives, drives crypto prices.

While retail traders blame “death crosses,” “whale selling,” or “AI stock rotation,” the real culprit (in our opinion) sits hidden in plain sight on the Federal Reserve’s H.4.1 report.

The Treasury General Account’s $647 billion surge drained liquidity from the financial system. The October government shutdown further exacerbated this drain, creating one of the driest periods for fiscal liquidity in years.

BTC fell 27% with no crypto-specific disasters. No exchange hacks. No regulatory crackdowns. No protocol failures. Just pure liquidity math. When the government collects more in taxes or issues more debt than it spends, cash flows out of the private sector and into the Treasury General Account, reducing the money available for banks, institutions, and investors to deploy into assets.

The October shutdown amplified this effect as federal spending halted while tax collection continued, creating a fiscal surplus that acted as a massive liquidity vacuum.

Liquidity, the total amount of money circulating through the financial system, is the primary determinant of cryptocurrency prices over medium to long timeframes.

While individual news events, regulatory developments, and technological advances create short-term volatility, they operate as noise around the dominant signal.

This isn’t mere theory; it’s an observable, quantifiable, and data-driven relationship validated across multiple market cycles with correlation coefficients ranging from 0.68 to 0.82, meaning that 68% to 82% of Bitcoin’s price variance can actually explained by net liquidity conditions.

The formula is pretty straightforward. Net liquidity equals the Federal Reserve’s balance sheet minus the Treasury General Account minus the Reverse Repo Facility, with adjustments for M2 money supply growth.

When the Fed’s balance sheet expands through quantitative easing, it injects fresh money into the system. When the Treasury General Account falls, it releases government cash back into private markets.

When these forces align positively, Bitcoin rallies. When they reverse, Bitcoin crashes.

Historical Cycles: Liquidity and Bitcoin Performance

The evidence spans every major cycle since 2017.

Bitcoin rallied from $1,000 to $20,000 in 2017 as global central banks maintained accommodative policy, then crashed 85% in 2018 as the Fed raised rates and conducted quantitative tightening. Recovery began in early 2019 precisely when the Fed paused rate hikes and ended QT in August of that year.

The 2020 to 2021 bull run saw Bitcoin surge from $3,800 to $69,000 as the Fed’s balance sheet exploded from $4 trillion to $9 trillion in the most aggressive quantitative easing program in history. Bitcoin peaked in November 2021 within weeks of the Fed announcing it would begin tapering asset purchases.

The 2022 bear market validated the inverse relationship. Bitcoin crashed 77% to $15,760 as the Fed conducted the most aggressive monetary tightening in four decades. The 2024 to 2025 rally followed the same script. Bitcoin surged as the Fed paused rate hikes in July 2023, inflation declined, and markets began pricing in rate cuts. Bitcoin peaked at $126,296 on October 14, 2025, then crashed 27% as the Treasury General Account surged while quantitative tightening continued.

The current crash provides the cleanest validation of the liquidity thesis yet. No FTX-style implosion. No Terra/Luna catastrophe. No China mining ban. Just accounting.

Market observers explicitly identified the mechanism. Mel Mattison noted on November 13 that “we have had one of the driest periods for fiscal liquidity in months if not years.” Paul Howard of Wincent observed that “crypto is closely linked to macro-economics now more than anytime in the past.”

The liquidity drain came first. The technical damage followed. Bitcoin formed its “death cross” after the decline was already underway, not before. The correlation with AI stock weakness wasn’t coincidence but confirmation.

When liquidity drains, all risk assets suffer simultaneously because they compete for the same pool of capital.

The Halving Myth?

Bitcoin’s community widely believes that four-year halving cycles drive price action. The logic appears sound: every four years, Bitcoin’s mining reward halves, reducing new supply and creating a “supply shock” that triggers bull markets.

But correlation doesn’t imply causation, and extant mathematics expose the narrative’s weakness.

Halving Impact vs. Liquidity Impact Comparison

The April 2024 halving reduced daily Bitcoin production from 900 BTC to 450 BTC per day, a supply reduction of $40.5 million daily at current prices. Bitcoin’s daily trading volume in November 2025 averages $71 billion.

The halving therefore reduces daily supply by 0.057% of trading volume. For context, the Treasury General Account surge from April to October 2025 drained $647 billion in liquidity, equivalent to 530 months of halving supply reduction.

If halvings were the primary driver, their impact should be immediate and mechanical. Instead, Bitcoin often consolidates or even falls in the months immediately following halvings, only rallying months later when liquidity conditions improve.

Halving Dates VS Fed Policy Alignment

The real pattern seems to be Federal Reserve policy cycles, not halving schedules. The halving dates coincidentally align with Fed policy inflection points, creating a spurious correlation.

Perhaps the crypto community prefers an internal mechanism to explain price action rather than acknowledging dependence on central bank policy, but the data is unequivocal. Bitcoin rallies when the Fed is dovish and accommodative. Bitcoin crashes when the Fed tightens. The halving schedule is irrelevant noise.

The cryptocurrency industry prefers to believe it’s independent of “legacy finance” and central banks. Bitcoin was designed as a hedge against fiat money printing, so the irony that Bitcoin price is driven by fiat money printing is not lost on observers. But markets are what they are, not what we wish them to be.

The evidence here seems pretty clear to me: liquidity explains crypto prices. This doesn’t invalidate Bitcoin’s long-term value proposition as hard money, censorship-resistant value transfer, or store of value. It simply describes the market dynamics that determine price discovery in the short to medium term. When liquidity expands, Bitcoin rallies. When liquidity contracts, Bitcoin crashes. Everything else, from halvings to headlines to technical patterns, appears to be noise around the signal.