Observers said that the crypto markets are preparing for a decline as liquidity tightens again after the U.S. Debt Ceiling is lifted.

As the Federal Reserve (Fed), which is winding down its balance, and the U.S. Treasury replenish their general accounts, hundreds of billions will be removed from the financial system. This will have a negative impact on the cryptocurrency prices over the next few months.

The thawing of liquidity conditions in the first half of this year has helped to lift prices for risk assets such as equities, digital assets and other financial instruments. The market-wide cryptocurrency rally propelled Bitcoin ( BTC), by far the largest cryptocurrency in terms of market capitalization to $31,000, before it turned into a meme coin speculative frenzy similar to the sugar rush at bull market tops.

The trend is expected to change once U.S. legislators approve increasing the government’s capacity to issue new debt. This will put pressure on risky investment.

The U.S. Treasury must first replenish its nearly depleted Treasury General Account, which will require about $500 billion in cash to be replenished from the financial sector.

Noelle Acheson, a macro analyst, said that risk assets are more susceptible to changes in liquidity than other safer investments such as bonds or many types of stocks.

Acheson explains that the Treasury’s withdrawal from its Fed account was one of the factors driving the market in early this year. Money that would have normally sat there was now being spent by the government.

The reverse is more likely to occur: the government will need to replenish the account balance by issuing bonds which will pull liquidity from the market back into the Treasury account.

Read more about the debt limit showdown and Bitcoin.

The Fed is continuing its quantitative tightening program, which was briefly interrupted due to the regional bank crisis in March, to reduce the bloated balance sheets from supporting the economy during pandemic.

In a report, macro analyst Lyn Alden described this as a “negative dual-whammy” for liquidity.

Alden stated that “the attractiveness of large, liquidity-driven stocks is lacking for the next few month unless we have more clarity about forward liquidity conditions.” Investors should be aware of their holdings, prepare for volatility and avoid excessive borrowing.

Tom Dunleavy of Dunleavy Investment Research, the founder of Dunleavy Investment Research, says that if this bill is passed as it stands, it will have a negative impact on liquidity.

In a Tweet, he explained that certain key aspects of the agreement, such as the curtailment of non-defense funds, the clawing back of pandemic relief money and the resuming payments on student loans, will limit the amount available for consumers to invest. Dunleavy said that “liquidity will be very negative.”

The U.S. House of Representatives will vote Wednesday evening on whether to raise the debt ceiling.

In a recent newsletter, FalconX, an institutional trading platform, wrote that tightening liquidity, a decreasing likelihood of the Fed lowering interest rates in this year, and the current trading environment, with its low volatility and volume, make the crypto markets vulnerable to a shock.

“This macro scenario (…) makes me believe we could be in a calm-before-the-storm moment for crypto,” David Lawant, head of research at FalconX, said.

James Rubin is the editor.