Biggest Threat to Crypto Is Back: Shutdown Risk Signals a Liquidity Collapse

The global crypto market lost approximately $100 billion in value on January 26, 2026, as traders reacted to rising fears of a U.S. government shutdown. Political tensions flared after Senate Democrats, led by Chuck Schumer, refused to support a funding bill that included full funding for the Department of Homeland Security (DHS) following a high-profile shooting in Minneapolis. This decision increased the likelihood of a partial government shutdown by January 31.

Bitcoin (BTC) fell more than 3.4% in a 24-hour period, and Ether (ETH) dropped 5.3%, while over $360 million in leveraged crypto positions were liquidated. Prediction markets on Kalshi and Polymarket have priced the odds of a shutdown at 80%, up from below 10% just 24 hours earlier.

The market move comes amid broader economic and geopolitical uncertainties, including U.S. military deployments in the Middle East and Trump’s proposed tariff hikes on Canada.

Why Did This Happen?

Senate Democrats have refused to back the funding package unless it removes or limits funding for DHS, which oversees ICE. Schumer accused Republicans of capitulating to President Trump’s hardline immigration policies, which have caused widespread protests and two deaths in Minnesota.

Democrats want structural reforms and accountability measures for ICE and Border Patrol operations. Their refusal to support the funding bill has stalled the broader appropriations package, which includes departments like Defense, Treasury, and Health and Human Services.

How Did Markets React?

Bitcoin’s price decline was the most immediate and visible sign of investor panic. The drop followed a sharp consolidation phase, with technical indicators showing a bearish flag pattern and key support levels under pressure.

Ether and smaller altcoins suffered even more severe declines. Ether dropped to around $3,000, near recent support levels, according to analysts. Liquidations surged, with $324 million in long positions wiped out in one day.

The fear of a government shutdown is not new for crypto investors. During the 43-day shutdown of late 2024, Bitcoin fell from its peak of $126,000 to below $100,000. That period coincided with heightened political tensions and the impact of Trump’s trade policies.

What Are Analysts Watching Next?

Market observers are watching closely how the political standoff unfolds. The U.S. House of Representatives has returned to session, and any changes to the funding bill would require additional votes, but time is limited before the Jan. 30 deadline.

In parallel, the Senate is also facing delays due to an impending snowstorm. The timing pressures are compounding the risk of a shutdown, which could disrupt the economy and financial markets.

The potential for a government shutdown also overlaps with the upcoming Federal Reserve’s interest rate decision. While the central bank is expected to hold rates steady, the broader economic environment remains fragile.

Analysts suggest that a prolonged shutdown could lead to further volatility in crypto and broader asset markets. Gold has already outperformed Bitcoin in recent weeks, with investors favoring traditional safe-haven assets.

Political developments in Washington remain a key wildcard. If the funding bill fails to pass, the shutdown could delay critical reports, including the next Bureau of Labor Statistics report, and impact essential services like the military and TSA.

Market sentiment remains cautious, with the Crypto Fear & Greed Index in the “extreme fear” zone for six consecutive days. Traders are closely monitoring both political developments and technical price action for signs of a potential rebound.