A major market downturn that has seen the crypto markets lose $250 billion in total capitalization over the weekend is due to a shortage of US liquidity, rather than any crypto-specific problem, argues Raoul Pal, founder and CEO of Global Macro Investor.
“The big narrative is that BTC and crypto are broken. The cycle is over,” said Pal on Sunday, explaining that this can’t be the case because Software as a Service (SaaS) stocks have fallen in tandem.
SaaS stocks and Bitcoin (BTC) have moved in lockstep recently, both dropping significantly, which is notable because both are “long-duration assets,” as their value is based heavily on expected future cash flows and adoption, making them sensitive to liquidity conditions and interest rates, he said.
This means the same narrative applies, with people saying “crypto is dead” and AI replacing software firms.
It also proves the same common cause, since two completely different asset classes are moving identically, suggesting the real driver is macro liquidity, not sector-specific problems.
“The rally in gold essentially sucked all marginal liquidity out of the system that would have flowed into BTC and SaaS. There was not enough liquidity to support all these assets, so the riskiest got hit.”
Government shutdowns add to liquidity drain
The temporary US liquidity drain has been exacerbated by the two government shutdowns and “issues with US plumbing.” The drain of the Reverse Repo was essentially completed in 2024, said Pal.
The Reverse Repo Facility (RRP) is where banks and money market funds park cash overnight at the Federal Reserve.
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Previously, when the US Treasury rebuilt its cash account (TGA), the negative liquidity impact was offset by the draining of the RRP. But now that the RRP is empty, there’s no offset available, so TGA rebuilds become pure liquidity drains, he explained.
Raoul Pal dismisses recent Fed chair narrative
Jeff Mei, chief operations officer at the BTSE exchange, told Cointelegraph that crypto is dropping “because investors now are under the impression that new Fed chair, Kevin Warsh, may not cut interest rates as fast or as much as they expected, given his tough stance on inflation and quantitative easing.”
However, Pal dismissed concerns about Trump’s Federal Reserve pick being hawkish, arguing that “Warsh’s job and his mandate are to run the Greenspan era playbook.”
This means cutting rates while letting the economy run hot, banking on AI productivity gains to control inflation.
“Warsh will cut rates and do nothing else. He will get out of the way of Trump and Bessent, who will run liquidity via the banks,” he said.
Pal closed on a bullish note, stating that the liquidity drain is almost over.
“We just can’t get every moving part right, but we now have a better understanding, and we remain HUGE bulls for 2026 because we know the Trump/Bessent/Warsh playbook.”
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