AI Investment Is Draining Crypto Liquidity, But Fed Rate Cuts Could Bring It Back
Cryptocurrency markets are feeling the squeeze as institutional capital rotates toward artificial intelligence infrastructure, according to GSR Head of Markets Spencer Hallarn. In an interview published August 12, 2026, Hallarn described the current environment as “a slow market,” noting that crypto activity generally follows prices and market capitalization.
Hallarn pointed to the scale of capital being raised by big tech companies to fund AI data centers and compute infrastructure as a key factor draining liquidity from digital assets. “The scale of capital being raised to fund AI infrastructure, including the equity big tech companies are issuing to pay for it, is tightening liquidity across markets more broadly, and crypto is feeling that pull,” he said.
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Market Makers Adapt to a Slower Crypto Market
The weaker market has pushed GSR’s clients toward longer-term budget planning and treasury management. Projects are increasingly looking to protect funds needed for dollar-denominated expenses regardless of crypto prices, driving demand for over-the-counter (OTC) hedging structures.
Hallarn also highlighted real-world assets as a major area of interest. Exchanges are expanding beyond crypto into equities, sports gambling, and other asset classes, creating new requirements for liquidity providers. This diversification is forcing market makers to adapt their strategies to a broader range of instruments.
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Tokenization Faces a Reality Check
Hallarn questioned whether current tokenization platforms are generating enough activity to justify the attention surrounding the sector. Many operate as “walled gardens” with extensive KYC requirements but have yet to produce meaningful transaction volumes.
“I’d actually frame tokenization less as a new trading product in its own right and more as a challenge to how traditional banking and settlement rails work today,” he said. “The bigger opportunity is in fixing the plumbing, not just wrapping an asset in a token.”
He added that liquidity remains fragmented across private platforms and alternative trading systems. Zero-knowledge technology could eventually make identity verification less restrictive, but that remains a future development.
GSR Builds for Market Convergence
GSR is developing price feeds, trading capabilities, and infrastructure connecting traditional finance with crypto. Hallarn said the core discipline of market making remains “quite portable” when moving between crypto, commodities, and securities, with differences largely depending on each market’s structure.
He sees opportunities in shifting hedging activity from crypto spot markets toward underlying equity and futures markets. This convergence between traditional and digital asset markets is a key strategic focus for the firm.
Fed Rate Cuts Could Support Another Rally
Hallarn said the return of a crypto bull run will depend heavily on macroeconomic conditions. “If AI-related investment cools off and the Fed starts cutting rates, liquidity should come back into the system, and that’s the kind of environment that could support another Bitcoin move higher,” he said.
He remains less certain about smaller cryptocurrencies, arguing that the sector must eventually deliver on promised use cases to sustain long-term value. The distinction between Bitcoin’s macro-driven appeal and the need for altcoins to prove utility is becoming more pronounced.
Despite the slowdown, Hallarn remains constructive on the industry, saying the underlying business needs have not changed: “Clients need liquidity, hedging, and execution regardless of where we are in the cycle.”
The coming months will be telling. If AI capital expenditures moderate and the Fed signals a more accommodative stance, the liquidity backdrop for crypto could improve markedly. Until then, market participants are likely to remain cautious, focusing on risk management rather than aggressive expansion.
This article is for informational purposes only and does not constitute financial advice. Cryptocurrency markets are highly volatile and uncertain. Readers should conduct their own research before making any investment decisions.
