Why has Bitcoin continued to decline since the U.S. government shutdown?

On the surface, this process is influenced by the escalation of U.S.-China conflicts, leading to price declines. The price drop has awakened doubts about the end of the four-year cycle in people's minds, resulting in defensive rather than offensive actions, naturally hindering market sentiment.

However, the deeper reason relates to real liquidity issues.

The U.S. government shutdown has lasted for more than a month now. How has the financial system's funding tightened during this government shutdown period?

Despite experiencing interest rate cuts from the Federal Reserve during this time and determining when to stop balance sheet reduction, the problem of tight funding has not been resolved; in fact, it has continued to worsen. It is not an exaggeration to say that the U.S. government's shutdown is draining market liquidity, an effect comparable to multiple interest rate hikes. This has offset the Federal Reserve's 25 basis point rate cut last month.

The following chart, which is used to observe market liquidity indicators, shows that the SOFR-IORB spread has broken historical highs, far exceeding the Federal Reserve's excess reserve rate of 3.9%.

What is SOFR?: The Secured Overnight Financing Rate, which reflects the marginal funding price in the repo market;

What is IORB?: The interest the Federal Reserve pays banks on reserve balances (Interest on Reserve Balances), which is the policy floor in the “floor system,” representing the lower limit of interest rates.

From the chart, we see that from 2021 to 2024, the spread remained around negative 10 basis points, meaning SOFR is usually lower than IORB—indicating ample reserves and smooth operation of the floor system.

However, in the last few months of 2025: the spread has consistently risen above zero, and the 30-day moving average has also turned positive and is rising rapidly, with the highest daily peak approaching +30bp.

This indicates that liquidity has tightened, meaning that the overnight funding price in the market has begun to exceed the risk-free return of banks “sitting on reserves to earn IORB,” suggesting that the available reserves in the system are nearing the “sufficient lower bound.”