The market began November with negative signals. In recent days, global financial markets, including cryptocurrencies, have suffered a bloodbath. On November 5th, US stocks experienced a "Black Tuesday," Asian stock markets followed suit, and the South Korean KOSPI index even triggered a circuit breaker. Cryptocurrencies were not far behind, with Bitcoin briefly falling below $100,000 yesterday, and ETH even touching $3,000. This sudden plunge has occurred more than once in recent months, and even with today's market recovery, it raises concerns that the market may have reached a bull-bear market boundary. Ultimately, the reason for the decline lies in liquidity. But the question remains: when will this decline stop? And where will it bottom out? Let's first return to the biggest external event: the US government shutdown. As of press time, the US government shutdown has lasted 37 days, breaking the previous record of 35 days set at the end of 2018 and the beginning of 2019, becoming the longest government shutdown in US history. While shutdowns are a common tactic in partisan politics, such a prolonged shutdown has still had an indelible impact on the market. The shutdown directly leads to the arrears of government salaries and contract payments, making it difficult for government personnel to receive income. Regulatory agencies are forced to operate at "low costs," which not only means that regulatory matters are stalled, but the negative effects continue to spread to major areas of people's livelihoods such as transportation, travel, healthcare, and public health. The paralysis of public services will also be transmitted through cash flow to the macro-consumer market, impacting the retail market. It is worth noting that the Supplemental Nutrition Assistance Program (SNAP), which provides food stamps to impoverished Americans, was suspended for the first time during this shutdown, negatively impacting social stability in the United States. On the other hand, the shutdown sends a political signal; the more intense the partisan battle, the higher the uncertainty of policy implementation. A shutdown also means the blocking of economic data; the lack of information amplifies emotional signals, increasing volatility while capital tends to seek safe havens, further leading to market volatility. More importantly, the shutdown means the US Treasury cannot inject liquidity into the market; instead, it siphons liquidity away from it. The Treasury General Account (TGA) is a centralized representation of government revenue and expenditure. The government obtains tax revenue and bond sales proceeds, which are then disbursed to the market through the TGA. This entire process is a crucial vehicle for maintaining market liquidity. The shutdown disrupted this cycle, causing the government to continue absorbing revenue, but only for internal maintenance, making it difficult to release it to the external market, ultimately becoming a "dammed lake" of liquidity. Data shows that as of last Friday, the Treasury's general account (TGA) balance exceeded $1 trillion for the first time, reaching a nearly five-year high since April 2021. This means that in the past three months, the Treasury has absorbed more than $700 billion in cash from the market, with more than $140 billion siphoned off during the 37 days of the shutdown. In other words, the shutdown's effect can be described as a "disguised interest rate hike." This liquidity crunch is also reflected in market signals. The Secured Overnight Funding Rate (SOFR) is the cost for financial institutions to lend money overnight using Treasury bonds as collateral, and it is usually close to the Federal Reserve's excess reserve ratio. While the interest rate has declined somewhat in the past month due to rate cuts, the basis between it and the Federal Reserve's excess reserve ratio has continued to widen. However, the SOFR surged 18 basis points to 4.22% on October 31, with the basis reaching 32 basis points at one point, the highest since March 2020, reflecting that actual borrowing costs in the market have increased rather than decreased. Furthermore, the Federal Reserve's reserves have fallen to $2.85 trillion, and the use of the Federal Reserve's Standing Repurchase Facility (SRF), established to address short-term liquidity shortages, hit a record high of $50.35 billion last Friday, also signaling continued liquidity tightness. Against this backdrop, global financial markets are on edge, with even slight changes in information causing sharp fluctuations. Just seven days prior, Powell had displayed a hawkish stance, stating that "further rate cuts at the December meeting are not a certainty, far from it," further heightening market caution. Following the Senate's 14th rejection of the Republican-led temporary funding bill on November 5th, global markets experienced a bloodbath. In the crypto market, liquidity issues are even more complex and prominent. Macroeconomic problems have systemic impacts, but for risky assets, there is also the issue of relative valuation. Looking at the growth of financial markets this year, the assertion that investing in cryptocurrencies is less profitable than investing in stocks and gold is not unfounded. If we follow… Using January 1st as a base, Bitcoin has grown 9.6% year-to-date, ETH 2.7%, while the S&P 500 has grown 15.55%, the Nasdaq 21.88%, and gold has seen a massive increase this year, with international gold prices rising by approximately 50%. Comparing these three, cryptocurrency trading has become the lowest-returning asset class. From a fundamental perspective, while cryptocurrencies have benefited from regulatory advantages, this is unsustainable. The stock market, however, still benefits from the AI sector, and gold has surged due to its safe-haven appeal. From an allocation perspective, the inflow of liquidity into the stock market and gold is understandable, but this has further depleted liquidity in the cryptocurrency market. Price trends of 500, gold, and Bitcoin, source: Counterflow. Looking at ETFs, institutional outflows are quite strong. Bitcoin spot ETFs saw outflows for five consecutive days starting October 29th, with a total outflow of $1.914 billion. Ethereum spot ETFs followed suit, with outflows of $719 million over five days. Meanwhile, DAT (Digital Amount and Bitcoin) stocks are showing a significant decline. After Strategy released its earnings report, analysts from three investment banks—Cantor Fitzgerald, TD Cowen, and Maxim Group—lowered their target prices for the stock, bringing their average target price to its lowest level since May of this year. DAT companies outside the top tier are also feeling the chill, with some listed companies even selling their cryptocurrencies to recoup losses. Even worse, the massive crash on October 11th nearly drained all liquidity from retail investors in the crypto market, further exacerbating the already insufficient liquidity. Liquidation data confirms this: yesterday, all major cryptocurrencies fell below warning levels, but the 24-hour liquidation volume was only $1.7 billion, demonstrating the weakness of secondary market liquidity. Faced with this situation, even some veteran on-chain players were not immune. According to JA_Maartunn data, from October 5th to November 4th, wallets holding coins for more than 155 days saw a net sale of approximately 405,000 BTC, accounting for 2% of the circulating supply. The market is sluggish, and internal turmoil is also brewing. On November 3rd, the long-established exchange Balancer was hacked, resulting in losses exceeding $128 million. As a DEX on par with Uniswap, the fact that a code problem could occur after five years of operation is undoubtedly a huge blow to industry confidence. With these three factors combined, a decline was inevitable, but more important than the reasons for the decline is when will it rebound? Among the aforementioned reasons, the most crucial trigger is the US government shutdown. Therefore, when the US government resumes operation, and the market performance afterward, becomes the focus of analysis. The current point of contention between the two parties in the US is the Affordable Care Act, which... Passed by Obama in 2010, the Affordable Care Act (ACA) has seen repeated attempts by Republicans to repeal or amend the law in recent years. With the extended subsidies expiring at the end of this year, insurance premiums for some Americans will rise significantly. Democrats insist on including supplementary provisions regarding healthcare in the temporary budget, while Republicans insist on ending the government shutdown before negotiating the healthcare budget. Despite their firm stances, given the prolonged shutdown, according to the Washington Post, citing sources, about a dozen Senate Democrats are considering voting to end the dispute. Market forecasts suggest that about half of the respondents believe the shutdown will end after November 16th. Institutional predictions show similar trends, with the next two weeks being crucial. Goldman Sachs predicts the shutdown is most likely to end after November 16th. The second week of November ended, and it was announced that air traffic controllers and airport security personnel would have their salaries suspended from October 28th to November 10th. The Federal Aviation Administration (FAA) stated that unless the shutdown ended by this Friday, it would reduce air traffic at 40 airports by 10% starting Friday—a factor that was also the reason the previous shutdown ended. Another institution, Citigroup, also expressed confidence that the government shutdown would end within the next two weeks. Of course, current information cannot guarantee that the shutdown will end within two weeks, but considering the stability of the US economy and society, the shutdown period is not expected to be too long. What will happen after the shutdown ends? As of now, the US government shutdown has reached... There have been 22 shutdowns, including three prolonged and significant ones: the 21-day Clinton administration shutdown in 1995-1996, the 16-day shutdown in 2013 due to healthcare reform disputes, and the 35-day shutdown in 2018-2019 due to disagreements over border wall funding. Historically, risk markets have shown significant increases after the shutdowns ended in all three cases. In 1995-1996, the S&P 500 rose 4% one month after the shutdown ended and 6.2% in three months; in 2013, it rose slightly by 0.1% one month and 7.4% in three months; while in 2018-2019, it rose 4.9% one month and 18% in three months. The reasons for its rise are twofold: firstly, market expectations improved after the shutdown ended; secondly, government intervention often involves significant liquidity injections to stabilize the market, as seen in the 2019 liquidity crisis, where the Federal Reserve quickly injected liquidity into the market through the New York Fed and subsequently announced the resumption of balance sheet expansion. This is also true in the current situation. It's also worth noting that the US stock market remains in a strong cycle, so a rebound is highly probable after the government shutdown ends, and the crypto market will likely follow suit. Despite the positive outlook, institutions and traders struggle to reach a consensus in the current volatile market. Optimistic figures like Bitwise Chief Investment Officer Matt... Hougan believes the bottom for Bitcoin's price is imminent and will arrive sooner than expected, with Bitcoin still having a chance to reach new highs this year, potentially rising to the $125,000 to $130,000 range. BitMEX founder Arthur Hayes shares a similar view, stating that the market will rebound strongly after the US Treasury and Federal Reserve increase liquidity. However, pessimists believe the market's "bottom" will continue to fall. Katie Stockton, founder of Fairlead Strategies, believes that after breaking below the 200-day moving average, the next downside target for cryptocurrencies is $94,200; Markus Thielen, CEO of 10x Research, also mentioned that if Bitcoin falls below $107,000, it will likely drop below $100,000. Looking at today's market, major currencies have shown some recovery, with Bitcoin rebounding to... Ethereum rose to $3,392, while SOL and BNB both saw slight increases.
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