Observers predict a possible downturn in Bitcoin and cryptocurrency prices due to an upcoming liquidity shock.

Crypto markets are preparing for a decline due to the resumption of liquidity tightening after the U.S. debt ceiling is lifted, according to experts. The U.S. Treasury general account and the Federal Reserve will retrieve hundreds of billions of dollars from the financial system as the Fed winds down its balance sheet. This will negatively impact the prices of cryptocurrencies in the coming months. Although the thawing liquidity conditions earlier this year helped increase the prices of risk assets, including equities and digital assets, the trend is set to change once U.S. lawmakers approve raising the government’s ability to issue new debt, putting pressure on risky investments. The U.S. Treasury will have to refill its almost completely depleted Treasury General Account, which means replenishing some $500 billion of cash from the financial system. This will especially hit risk assets, as they tend to be more sensitive to liquidity conditions. Refilling the general account coincides with the Fed continuing its quantitative tightening campaign. The debt ceiling resolution bill will also contribute to the negative impact on liquidity. Tightening liquidity conditions, decreasing probability of the Fed cutting interest rates this year, and the present trading environment make crypto markets ripe for a shock.

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