In a story that is becoming all too familiar to crypto bulls, prices fell sharply on Thursday even as gold and silver hit new record highs.
Bitcoin fell about 2% in the past hour to $108,800, having all but abandoned its rebound following Friday’s crash. Action in rest of crypto shows even steeper declines, with ether , and Solana among those who saw declines of around 3% over the last sixty minutes.
Precious metals, however, continue to trade extremely well, with gold rising another 2% to hit a new record just below $4,300 an ounce. Silver is ahead by 3.6% and also hitting a new record high.
What gives?
Wondering what’s holding Bitcoin back? and other major tokens under pressure after last week’s much-needed removal of excess debt?
The likely catalyst is tightening liquidity in the financial system, which appears to be tempering investors’ risk appetite.
The ongoing tightening is evident in the spread between the guaranteed overnight funding rate (SOFR) and the effective federal funds rate (EFFR), which rose from 0.02 to 0.19 in a week, reaching its highest level 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. Borrowers typically include banks, brokers, asset managers, money market funds and insurance companies. SOFR is considered a secure, almost risk-free rate based on actual transaction data.
The EFFR indicates the weighted average interest rate at which banks lend their excess reserves overnight to other banks in the federal funds market. This is an unsecured, unsecured interbank lending rate, influenced primarily by the monetary policy of the Federal Reserve.
When SOFR exceeds EFFR, it indicates that lenders are demanding a higher yield, even for collateralized borrowing backed by U.S. Treasury securities. This signals tight liquidity conditions and makes borrowing more expensive in the short term.
The latest spike in the spread could limit gains for BTC, which is considered by many to be a pure liquidity play.
Note that the spread is still considerably lower than the high of 2.95 seen during the 2019 repo crisis.
That said, other signs of financial stress are also present. For example, on Wednesday, banks withdrew $6.75 billion from the Permanent Repo Facility (SRF), the highest amount since the end of the coronavirus pandemic, excluding quarter-end periods.
The SRF, introduced in 2021, provides a safety net in the event of a potential funding gap by extending overnight cash loans against U.S. Treasuries twice daily.
All these signs of tightening liquidity have raised hopes on crypto social media that central banks could soon step in to ease the pressure, potentially recharging the engines of BTC bulls for a new rally to new highs. Whether this plays out as the bulls expect remains to be seen.
