I/O Fund Called the Bitcoin Selloff: What Liquidity & DXY Data Predict Next

Within crypto, there are perma-bulls and perma-bears, but both are too emotional and dogmatic to consistently participate in Bitcoin’s epic swings. Bitcoin and crypto have consistently tested investors by doing the exact opposite of what the herd is expecting.  

Last August, my firm, the I/O Fund, offered a rare explanation of how Bitcoin is sensitive to investor sentiment patterns and global liquidity trends, thus predicting the asset could be topping in an article for our free newsletter readers entitled “Is Bitcoin’s Bull Run Nearing a Top? What the Herd Missed at $16,000 and is Missing Now” 

In that article, I stated ...  

“...the system that helped us identify the $16,000 bottom in Bitcoin is telling a more complex story. Global liquidity appears to be stalling and setting up for a reversal. This is historically not good for Bitcoin and tends to coincide with major tops. This inflection point lines up with our Technical Analysis that has us in the final leg of the multi-year bull market.”  

This is the core differentiator of our approach: we analyze Bitcoin not as a belief system, not as ideology, not as emotion — but as an asset driven by sentiment patterns, that also operates within a global liquidity machine.  

Today, the buzz word is “liquidity” and how it’s draining from global markets, causing volatility in risk assets. This is not a surprise to our readers, as we have been discussing liquidity dynamics for months, as it is one of the few data-driven dynamics that can help predict Bitcoin’s swings. We even hosted a free webinar to the public in August alongside WealthUmbrella, explaining how these dynamics are threatening Bitcoin’s advance higher. 

Since our free webinar, Bitcoin has dropped ~37% and even broke one of our critical supports. We followed through with four sell alerts to our premium members as Bitcoin traded between $95,000 and $113,000, securing exceptional gains and reducing our Bitcoin exposure by 80%. We did something similar with altcoins. 

However, looking forward, we could see more volatility before Bitcoin resumes its leadership to all-time highs. If you hold Bitcoin or have large unrealized gains, this is a crucial moment. The technical picture has shifted, increasing overall risk, with a scenario where we head lower. Our analysis breaks down the exact support levels that must hold, the scenario for a final push to new highs, and the path that would confirm a deeper downturn. 

Global Liquidity and DXY: The Inverse Relationship Driving Bitcoin's Cycles 

Since the market peak in late October, “liquidity” has become a buzzword, casually invoked as though its meaning were universally understood. Instead, liquidity is one of the most overused - and least understood - terms in financial markets.

Liquidity refers to the availability of capital in the system—specifically, how easily businesses, consumers, and financial institutions can obtain cash or credit. But when it comes to actually positioning a portfolio through different liquidity regimes, how this impacts risk-on assets often gets lost in translation.

In modern markets, liquidity is inseparable from debt dynamics. It is not the creation of new debt that dominates capital flows, but the ability to roll over existing obligations. In fact, three out of every four global financial transactions are related to debt refinancing, not expansion. Moreover, nearly 80% of global lending now requires collateral, typically in the form of high-quality, low-volatility assets like U.S. Treasuries.

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This creates a framework where liquidity—and by extension, risk appetite—is dictated by how cheaply and easily borrowers can refinance without overextending their own balance sheets. The more capital that’s freed through this process, the more capital can rotate into risk-on assets such as Bitcoin.  

A few key variables influence a country’s liquidity conditions: 

• Central bank policy 
• Fiscal spending 
• The Treasury General Account (TGA) 
• Federal Reserve repo operations 
• Broad equity market performance 
• Bond market volatility 

Collectively, these forces determine whether capital and confidence flow into the system or are pulled out.  An internal calculation we have created at the I/O Fund, which incorporates all of these factors, can be seen below.  Domestic liquidity has broken through the 2022 low, driven predominantly by questionable FED policy, the Reverse Repo Operations at $0, and the Treasury General Account remaining elevated due to a shift in public financing policy.

I/O Fund chart showing Domestic Liquidity (WALCL) levels falling below the critical 2022 lows, tracked via Reverse Repo, TGA Balance, and Fed’s balance sheet, signaling increased downside risk for risk assets and equities. 

Even with Domestic liquidity in free fall, there is one factor that is the most important when discussing this topic - U.S. Dollar.  

Roughly 64% of global debt is denominated in USD—which means foreign borrowers who accessed cheap U.S. capital must continue sourcing dollars to service that debt. When the dollar weakens relative to their local currencies, less local currency is needed to meet dollar obligations. This frees up capital that can chase higher-yielding risk assets, including Bitcoin. 

This inverse relationship between the U.S. Dollar Index (DXY) and Bitcoin has been both consistent and predictive across cycles:

I/O Fund chart comparing Bitcoin's price to the U.S. Dollar Index (DXY), demonstrating that every major Bitcoin bull market occurs during a declining dollar, and bear markets coincide with a rising dollar.  

In the above chart, three dynamics are evident: 

• Every major Bitcoin bull market occurred during a declining dollar. 
• Every significant Bitcoin bear market coincided with a rising dollar. 
• The steepness of the dollar’s trend often defines the magnitude of Bitcoin’s move in the opposite direction. 

In August, we approached a critical inflection point. The Dollar Index had been in a clear downtrend since peaking in late September 2022—just weeks before Bitcoin bottomed. The most recent leg of this decline in the dollar shows a completed five-wave structure, typically the final phase of a correction before a reversal. Momentum is starting to shift upward, and a sustained break above $101 on the DXY would confirm a major low and the onset of a new dollar uptrend.  

However, if we analyze the technical pattern in DXY, as long as DXY stays below $101, there is a setup where it drops to new lows.  – likely targeting between $93 - $89.

I/O Fund Technical Analysis of the U.S. Dollar Index (DXY) showing potential final 5th wave drop toward $93-$89. The chart highlights the critical $101 resistance level and uses momentum indicators to predict an imminent move lower, increasing global liquidity and likely pushing Bitcoin higher. 

Note how the current bounce is not a direct move higher. It is a messy, and overlapping push higher, which is characteristic of corrections within a larger trend – in this case, pointing lower. Furthermore, the momentum indicators point to a rare overbought condition, while also showing that momentum is fading the higher we go. This is what we see at the end of swings, suggesting a move lower is imminent.   

If DXY fails under $101, and the following drop is a more vertical and aggressive drop lower, then we could see an extended drop in DXY to new lows, which would increase global liquidity, and by extension, should push Bitcoin higher.  

Having correctly called the U.S. Dollar Index low earlier this year, we noted that, “Until DXY can break above $101, it can still make another low, which will further support higher prices in Bitcoin. The takeaway here is to note that the U.S. dollar is closer to a major low than most think. While it can extend further, and likely will, once we get evidence of a major trend reversal, this should line up with a topping process in Bitcoin. Until then, we can and should see Bitcoin continue an upward trajectory.

Bitcoin Price Drivers: Why Sentiment and Technical Analysis Beat Fundamentals 

Bitcoin is unlike stocks. There are no earnings reports, no 10-Ks, no revenue models, no management teams to evaluate, and no real competition—despite occasional claims that alternatives like Ethereum could challenge it. The reality is simple: Bitcoin has already established itself as the definitive digital store of value.  

Thematic investing also suggests that the positive news developments are tailwinds for Bitcoin that should support higher prices from here. In fact, we are hearing the same today – A favorable administration that is supporting Bitcoin, as well as a strategic Bitcoin reserve being established. These are both bullish narratives for Bitcoin, which should logically support higher prices. However, if we look at history, Bitcoin has an uncanny inclination to do the opposite of what the news-based narrative at the time suggests. In other words, it likes to top on bullish news and bottom on bearish news.   

Chart comparing Bitcoin Price to major news events, demonstrating that movements are driven by market psychology and technical analysis patterns—like the five-wave pattern—rather than fundamentals or bullish narratives. 

So, if narratives do not seem to affect price, what actually drives its price? One of the major drivers of crypto is sentiment, which can only be measured through the lens of technical analysis.  

Sentiment is simply analyzing herd mentality, which manifests in repeatable patterns. It is a powerful force in the markets. When you funnel human consciousness into a quantifiable system like public markets, strange patterns emerge and they emerge time and time again on all timeframes, on all markets and going back throughout history. Patterns like triangle, bull flags, bear flags, head and shoulder patterns, cup and handle patterns, are very common technical analysis patterns that gauge where the herd is likely moving next.  

The most important pattern within technical analysis is the five wave pattern, which we have discussed in the clip below. It underpins all of this and is what marks a trend. 

The clip below from our Free Bitcoin Webinar further explains the importance of a 5-wave pattern in markets... 

I/O Fund Portfolio Manager Knox Ridley analyzes two potential scenarios that could push Bitcoin to a major top in the $200,000 range following the current pullback. 

The fact that a clear 5 wave uptrend has completed off the 2022 low, with the final push moving higher on decelerating volume, had us quite concerned. The most likely path forward has been higher, which I presented in our August report - yet this has now been invalidated, forcing me to create a more unconventional path higher. While this path is possible, it is not probable, based on the technical outlook alone.   

I/O Fund Technical Chart: Bitcoin's 2022 Bull Cycle has completed a full Five-Wave Pattern, with weakening Volume and RSI trends signaling increased market risk. The breaking of key support levels below $74,440 suggests a major warning for the bulls. 

However, if any break lower can hold over $74,440, then this path is valid and worth monitoring, especially if we see DXY break lower. We could even see this drop push toward $67,000 in an extended move. However, below $67,000 and there is no path higher, before seeing an extended bear cycle take us back into the $40,000 region or lower.  

What is also concerning can be seen in the volume and momentum patterns above. Note how volume has always expanded as price went higher, then contracted as price corrected. This is a healthy trend and one we have used to time buys along the way.  

However, since the April low in 2025, we have reversed this trend. Volume has been decelerating as price went higher, and now it is expanding as price moves lower. This is not a healthy trend and is signaling that sellers are starting to show up in force.  

This is further backed by the RSI breaking through its bull market support. Note how each correction found a low when the RSI bottomed out around 33. This support has held throughout the bull cycle. However, it recently broke this support, which is not what we typically see in bull cycles.  

We are not only seeing critical supports break in Bitcoin, but the volume and momentum trends are shifting in real time. Technicals alone are flashing big warnings for the bulls, which has us in a much more defensive posture than any time during this bull cycle.

Regarding the bull scenario, we would need to see a vertical push over $114,000 before the odds start shifting in that direction. If this happens, we will continue our game plan to trade Bitcoin in its final swings of the epic bull cycle that started in 2022.

If you are sitting on outsized gains from Bitcoin or wondering how to professionally incorporate risk management into your process, join us Thursdays for our premium webinars. In the weekly webinars, we discuss what we are doing with our crypto positions in real-time.

For a limited time, get up to $250 off with one of our biggest sales of the year starting Nov 28th. For more information on our annual sale, click here.

On-Chain Analysis by WealthUmbrella: A Healthy Ecosystem held Hostage by ETF Flows. 

We’ve consistently relied on WealthUmbrella’s top-tier On-Chain Analysis throughout this cycle. Their model flashed a buy alert in December 2022, around the same time our own system showed a major opportunity in Bitcoin. The below section was contributed by Vincent Duchaine of WealthUmbrella, who sees higher levels before a cyclical top for Bitcoin.   

Since the new bull cycle in Bitcoin started in December of 2022, we are seeing the largest price drop within this cycle, which is currently greater than -35%. Strangely, and unlike any period of notable volatility we have experienced in the last 3 years, the on-chain health of Bitcoin simply does not warrant the size of this drawdown.  

While we are seeing a healthy on-chain ecosystem, what is driving the current period of volatility is ETF selling. We were expecting this dynamic at some point, because the hype around the BTC spot ETF created an unusually tight correlation between Bitcoin and the stock market. In that environment, Bitcoin was unlikely to thrive while market breadth was deteriorating and signaling a risk-off shift. 

This new dynamic has linked Bitcoin to the state of the equity market, which could see another leg lower. However, our cyclical indicators suggest that we are likely not experiencing a cyclical top, and any further volatility could be considered a mini bear phase, within a larger bull cycle, like we experienced in 2013 and 2021. 

For example, new non-zero-balance addresses remains quite healthy. People are still joining the network at a steady rate.  

WealthUmbrella’s On-Chain Analysis chart showing Bitcoin's network adoption remains healthy and strong, evidenced by a steady increase in new non-zero-balance addresses despite the recent -37% price drop in the bull cycle.  

Furthermore, this is happening while the sentiment of people who hold Bitcoin as an actual crypto asset on the blockchain remains far from bearish. Not only is the influx of new participants on the blockchain still very healthy, but whales have also been aggressively buying the dips.If we look at holders controlling more than one hundredth of the total supply (around 200,000 BTC), their balances have actually increased since the end of October. 

WealthUmbrella On-Chain Chart illustrating significant Bitcoin Whale accumulation (approx. 110,000 BTC) during the recent price drop, contrasting underlying network strength with masking ETF outflows and signaling seller exhaustion. 

In fact, their accumulation — roughly 110,000 BTC — is almost identical to what they accumulated during the “Tariff correction” earlier this year (about 120,000 BTC). These are not signs of desperation, and it’s entirely possible that the scenario where whales ultimately come out on top of this correction will play out once again. 

The issue is that ETF outflows are masking this underlying strength. That being said, ETF balance sheets have already shrunk by about 4% in native units (from 1.362 million BTC to 1.307 million BTC), on top of a decline of roughly 36% in value at the worst point. Not only do we expect the stock market to rebound somewhat, but Friday’s flush happened on noticeably lower BTC ETF outflows, which is a classic pattern of seller exhaustion. 

WealthUmbrella chart of Bitcoin Spot ETF Net Inflow/Outflow shows recent volatility driven by ETF selling, with a notable slowdown in outflows signaling potential seller exhaustion and a shift away from a full cycle top.  

Now, as we sit nearly $10k above the recent low, it’s clear that we are at least in a bounce. The question is whether this is just a bounce or the beginning of a renewed bullish trend? 

According to our analysis, while ETF dynamics are creating a new risk in our models, we are simply not seeing the type of signals that coincides with a cycle top. We created four cycle top indicators, which monitors different layers of the Bitcoin ecosystem. None of these indicators have reached levels that is consistent with a true euphoric/overbought top consistent with prior major tops.  

WealthUmbrella On-Chain Chart showing Bitcoin Cycle Top Indicators remain below euphoric/overbought levels, suggesting the current volatility is due to ETF selling and not consistent with a final cyclical Bitcoin top consistentwith the end of bull cycles in Bitcoin.  

The current correction, as shown above, has a unique dynamic, which is the result of ETF adoption. The volatility we are experiencing is being driven mostly by ETF selling and is a stark reminder of the risks associated with Bitcoin. Even in a neutral on-chain environment — not a bearish one — ETFs selling just 4% of their holdings triggered a 35% drop in price. This highlights how illiquid the market has been over the last few months. It’s something that has concerned us since 2022, when the proportion of long-term holders on the blockchain became extraordinarily high (the share of coins unmoved for a year peaked at 71% at the end of 2023). Bitcoin’s strength back then was that nobody was selling, unlike in 2017 when everyone was instead eager to buy. ETFs brought back a bit of that demand dynamic, but it became clear that unless euphoria returns on-chain, Bitcoin will remain tightly correlated to stock-market risk-off movements and may suffer from liquidity shortages during equity corrections. In our view, the long-term risk of holding Bitcoin will diminish once the balance between ETF-driven buying and on-chain buying normalizes, and once Bitcoin’s strength relies less on a pure hodler mindset and more on a healthy, rotating, and liquid market. 

In Conclusion 

Bitcoin is undeniably the most lucrative asset in market history with an astronomical return of over 100,000%. Even if you missed day one, there have been many opportunities to participate along the way. This is where our firm has excelled as we have a strong track record of trimming near local tops and loading back up at lower prices. This can significantly shift total return.  

For example, while many chased the 2021 hype with $200,000 or $500,000 price targets, we took a disciplined approach—cutting crypto exposure by half to lock in gains at $58,000. We then went on record stating Bitcoin was a strong buy at $16,000. From there, we continued to highlight Bitcoin as a buying opportunity in six additional free articles (here, here, here, here, here) all the way through October of 2024. We didn’t just talk about the early stages of the bull cycle—we acted on it, issuing 12 buy alerts to our premium members as Bitcoin advanced from $25,000 onwards. 

Beginning in August, our tone changed. We began to warn that the risk in Bitcoin was rising, even though the same talking heads that missed the lows were telling us the rally was just beginning. Since then, we’ve released two articles outlining this increased risk (here, here), and even hosted a free public webinar, just before Bitcoin dropped 35% 

No investor is perfect — rather our results reflect a disciplined, data-driven approach that has delivered a track record surpassing many of Wall Street’s most recognizable firms. That same framework informs our AI research, including a leading AI-energy position up ~500% this year. 

If you’d like to see the exact stocks we own — including weightings, real-time trade alerts, and the in-depth research that attracts Tier-1 media coverage — we invite you to take advantage of our Black Friday Sale.

Take advantage of the I/O Fund’s largest sale of the year with up to $250 off Advanced Market Signals, which offers Knox’s weekly webinars, real-time trade alerts, and in-depth analysis on the most powerful tech trends. Learn more here.

Please note: The I/O Fund conducts research and draws conclusions for the Fund’s positions. We then share that information with our readers. This is not a guarantee of a stock’s performance. Please consult your personal financial advisor before buying any stock in the companies mentioned in this analysis.

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