Bitcoin's Struggle to Rally Amid Fed Easing: Is Liquidity the Real Bottleneck?

Bitcoin's price has lingered just below the $120,000 threshold in 2025, despite a macroeconomic environment that appears structurally bullish. The Federal Reserve's 99.3% probability of a 25-basis-point rate cut in SeptemberBitcoin’s Long-Term Price Potential: A Macro and ...^[5], a weak U.S. dollar, and expanding global liquidity metrics like M2 money supplyBitcoin, Liquidity, and Macro Crossroads^[2] have created fertile ground for risk-on assets. Yet, Bitcoin's inability to break out decisively has sparked debates about whether liquidity constraints—not macroeconomic fundamentals—are the true bottleneck.

Macro Backdrop: A Fed-Driven Tailwind

The Federal Reserve's dovish pivot has been a cornerstone of Bitcoin's 2025 narrative. With inflationary pressures easing and unemployment trending downward, the Fed's September rate cut is widely anticipated to reduce borrowing costs and incentivize capital to flow into alternative assets like BitcoinBitcoin’s Long-Term Price Potential: A Macro and ...^[5]. This dynamic is amplified by the dollar's relative weakness, which has made Bitcoin more attractive to global investors. Meanwhile, global liquidity expansion—reflected in a 7.2% year-over-year increase in M2 supplyBitcoin, Liquidity, and Macro Crossroads^[2]—has further supported risk appetite.

However, these macro tailwinds have not translated into a sustained price breakout. Instead, Bitcoin's on-chain metrics tell a more nuanced story. The MVRV Z score and SOPR ratio suggest healthy accumulation by long-term holdersBitcoin, Liquidity, and Macro Crossroads^[2], while institutional investors are allocating an average of 22% of their net income to BitcoinBitcoin’s Long-Term Price Potential: A Macro and ...^[5]. Yet, the asset remains trapped in a consolidation phase, raising questions about structural liquidity limitations.

Institutional Demand: A Double-Edged Sword

Institutional adoption has been a defining theme of 2025. Over 28 new treasury companies formed in July and August alone, collectively adding 140,000 BTC to their reservesAsia Morning Briefing: BTC Treasury Demand Is Weakening^[1]. These entities, ranging from hedge funds to corporate treasuries, have driven a 140% year-over-year surge in Bitcoin futures and options tradingBitcoin Weekly Forecast: Bitcoin rebounds, supported by ...^[3], deepening the derivatives market and enabling sophisticated risk management strategies.

Yet, this demand has created a paradox. While institutional buying has pushed Bitcoin's price higher, it has also exacerbated liquidity bottlenecks. By late August, institutions were absorbing over 3,100 BTC per day—six times the 450 BTC mined dailyAsia Morning Briefing: BTC Treasury Demand Is Weakening^[1]. This 6:1 imbalance has forced buyers to compete for a shrinking supply of available Bitcoin, particularly as exchange reserves have plummeted to historic lows of 2.6 million BTCBitcoin Supply on Exchanges Is Shrinking - DeFi Planet^[6]. The result? A self-reinforcing cycle where aggressive buying compresses liquidity, amplifying volatility and creating a “race to the bottom” for available inventory.

Liquidity Dynamics: Time, Depth, and Institutional Tactics

Bitcoin's liquidity is far from static. Research on Binance's BTC/FDUSD order book reveals stark 24-hour cycles: liquidity peaks at $3.86 million at 11:00 UTC but drops 42% to $2.71 million by 21:00 UTCAsia Morning Briefing: BTC Treasury Demand Is Weakening^[1]. This temporal asymmetry forces institutional traders to time their executions meticulously, often splitting large orders or leveraging derivatives to minimize slippage. For example, a $1 million trade at 11:00 UTC would encounter significantly less slippage than the same trade at 21:00 UTCAsia Morning Briefing: BTC Treasury Demand Is Weakening^[1].

Structural liquidity constraints further complicate matters. While depth grows at 10 basis points from the mid-price, it declines sharply beyond 25 basis pointsHow Liquidity Really Works in Crypto Markets^[4]. This non-linear distribution means that even minor price movements can trigger disproportionate slippage for large orders. Institutions have adapted by using longer-dated futures and spot-quoted derivativesBitcoin Weekly Forecast: Bitcoin rebounds, supported by ...^[3], but these tools cannot fully offset the scarcity of available liquidity.

The Bottleneck: Exchange Reserves and Market Psychology

The most critical liquidity bottleneck lies in Bitcoin's exchange reserves. With just 2.6 million BTC held on exchanges—down from over 5 million BTC in early 2025—trading liquidity has become increasingly scarceBitcoin Supply on Exchanges Is Shrinking - DeFi Planet^[6]. This decline reflects a broader shift toward self-custody and cold storage, as investors prioritize long-term value preservation over short-term speculation. While this trend is bullish for Bitcoin's institutional credibility, it has also tightened the available supply for trading, making the market more susceptible to volatility.

This dynamic is evident in Bitcoin's price action. Despite strong fundamentals, the asset's low exchange reserves mean that even modest institutional buying can trigger sharp price spikes. Conversely, any dip in demand—such as the 86% decline in average purchase sizes by treasury companiesAsia Morning Briefing: BTC Treasury Demand Is Weakening^[1]—can lead to rapid corrections. The result is a market that oscillates between bullish momentum and liquidity-driven fragility.

Conclusion: Liquidity as the Unseen Gatekeeper

Bitcoin's struggle to break above $120,000 is not merely a function of macroeconomic uncertainty or bearish sentiment. Instead, it reflects a deeper structural issue: liquidity constraints that amplify volatility and create bottlenecks for institutional capital. While the Fed's rate cuts and global liquidity expansion provide a favorable backdrop, these factors cannot overcome the reality that Bitcoin's available supply is being outpaced by demand.

For investors, the key takeaway is clear: liquidity metrics—exchange reserves, order book depth, and institutional buying patterns—must be monitored as closely as price action. In a market where every BTC is a scarce resource, understanding these dynamics could mean the difference between capturing a breakout or being caught in a liquidity trap.