Sygnum CIO suggests Bitcoin may experience additional declines due to liquidity constraints, yet maintains a positive long-term outlook.

Fabian Dori indicates that a temporary liquidity crunch is contributing to the decline in crypto, with further decreases possible; however, strengthening macroeconomic indicators and fundamentals may accelerate recovery.

Bitcoin could dip further due to liquidity constraints; the long-term bullish outlook persists: Sygnum CIO. (Unsplash, modified by CoinDesk)

Key points:

• Sygnum Bank CIO Fabian Dori asserts that bitcoin’s downturn is a result of a liquidity-driven squeeze rather than a fundamental breakdown.
• Market sentiment is currently at extremely fearful levels, rendering it susceptible to additional volatility and declines.
• Dori believes that enhancing business cycle data, growth in stablecoins, and institutional adoption provide a positive long-term perspective.

Bitcoin’s BTC$67,111.68 volatility is expected to stay high in the short term, with prices potentially decreasing further as crypto markets face a liquidity squeeze and fractured sentiment, according to Sygnum Bank’s chief investment officer, Fabian Dori.

However, he contends that the longer-term outlook remains stable.

“We anticipate continued high volatility in the short term, and prices may even drop further from this point,” Dori stated in an interview with CoinDesk. “Investor sentiment has diminished significantly. There is minimal trust and confidence for investors to increase their exposure.”

The recent disparity between gold, which has remained steady, and innovative assets such as Nasdaq tech stocks and bitcoin highlights the fragility of the current market environment. Nonetheless, Dori warns against seeking a singular cause for this disparity.

“There is no single cause, indicator, or driver behind this gap,” he explained. “It is a combination of various factors that have developed over recent months.”

Crypto markets have been on a downward trend in recent months, with bitcoin and other major cryptocurrencies retreating from previous highs as macroeconomic challenges and inconsistent institutional flows negatively impact sentiment. Persistent inflation and changing expectations regarding Federal Reserve rate reductions have dampened risk tolerance, while sporadic geopolitical tensions have intensified the broader exit from speculative assets. Additionally, erratic exchange-traded fund (ETF) flows, reduced liquidity, and instances of leveraged liquidations have exacerbated downward movements, hindering prices from regaining momentum and repeatedly testing critical support levels.

Thin ice

Dori argues that the crypto market has been “on thin ice” for an extended period.

Long-term holders have become cautious of bitcoin’s four-year cycle and the potential for a correction phase. This wariness has left the ecosystem in a more fragile position, with fewer strong hands available to absorb volatility.

On top of this, there are crypto-specific liquidity challenges and wider macroeconomic pressures.

Since June of last year, the U.S. Treasury has significantly increased the issuance of bills and notes, resulting in higher balances in the Treasury General Account (TGA) at the Federal Reserve. The issuance of these bills effectively withdraws liquidity from the markets, leaving it idle.

“They are non-productive assets,” Dori noted. “And crypto, being one of the most liquidity-sensitive asset classes, has been heavily impacted.”

A significant liquidity event on October 10 further dampened risk appetite among investors and market makers, accelerating the weakening of crypto market depth. Funding rates plummeted, and liquidity conditions worsened.

Simultaneously, concerns ranging from bitcoin’s store-of-value narrative to risks associated with quantum computing, forced liquidation of reserves by digital asset treasuries, and delays in U.S. legislation, including the anticipated Clarity Act, have intensified uncertainty.

With sentiment already fragile, even minor headlines now trigger exaggerated price fluctuations.

“The ecosystem was already on thin ice due to the cyclical dynamics,” Dori remarked. When additional liquidity constraints and collapsing sentiment are added, it creates a very vulnerable situation, he added.

Since early October, bitcoin has experienced drawdowns of approximately 40% to 50% from its recent peaks. The last time the markets faced declines of this magnitude was during the systemic crisis of 2022, raising renewed concerns about wider structural risks.

Dori dismisses this comparison.

“From a macro standpoint, regulatory clarity, institutional adoption, and counterparty reliability, the current situation is entirely different from 2022,” he stated. “This is not the same systemic risk environment.”

Liquidity turn?

Dori believes that the present weakness signifies a short-term liquidity squeeze rather than a fundamental shift.

Market data, he suggested, reveals empirical signs of improvement beneath the surface.

The U.S. business cycle is expanding. ISM services activity has increased in recent months, and manufacturing reports have exceeded expectations, historically prerequisites for enhancing risk appetite.

At the same time, while headline inflation remains above the Federal Reserve’s 2% target, it is not at levels that previously raised acute concerns regarding trade policy or tariffs. According to Dori, the trend appears subdued enough to enable the Fed to maintain its rate-cut cycle in the coming months.

“That would enhance liquidity conditions again,” he stated.

Liquidity pressures driven by the Treasury could also alleviate, paving the way for a quicker turnaround ahead of the next Federal Open Market Committee meeting, Dori added.

From a crypto-specific perspective, the fundamental landscape remains positive. The growth of stablecoins continues, integration into traditional finance is broadening, and the number of native tokens locked on networks like Ethereum and Solana remains strong.

Institutional adoption, although inconsistent, is still advancing.

“Once sentiment stabilizes and liquidity conditions improve, the gap between traditional assets and crypto should diminish again,” Dori remarked.

Searching for a trigger

For the time being, however, sentiment is the prevailing influence.

Fear-and-greed indicators are at extreme fear levels, highlighting the lack of appetite to increase exposure. “That clearly shows that trust and confidence are very limited,” Dori stated. “We need some form of catalyst.”

What that trigger might be remains uncertain.

The enactment of comprehensive U.S. crypto legislation, like the Clarity Act, would represent “an exceedingly positive development,” he noted. A normalization of geopolitical tensions could also aid in restoring broader investor interest.

Improvements in concerns related to artificial intelligence and sustainability narratives could offer additional support. Meanwhile, a further recovery in liquidity conditions, combined with ongoing institutional inflows, would bolster the positive case.

Until then, markets remain vulnerable.

The short-term outlook, due to sentiment, is not optimistic, Dori noted. However, he remains assured that the structural foundation is stronger than it appears.

“Fundamentally, we observe improving business cycle data, stablecoin growth, institutional engagement, and enhanced counterparty risk management,” he stated. “That is very different from what we experienced in 2022.”

In Dori’s view, bitcoin’s current decline is more a reflection of liquidity dynamics and eroded confidence than a judgment on its long-term viability.

Volatility may escalate before it calms down. Prices may even test lower thresholds. Nevertheless, if liquidity conditions improve and macro data continues to strengthen, Dori believes the turnaround could occur sooner than anticipated.

Currently, crypto remains in a precarious position. However, he contends that the fundamentals are gradually improving beneath the surface.

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