A sharp market downturn that wiped roughly $250 billion from the crypto market’s total capitalization over the weekend was driven by tightening U.S. liquidity rather than any crypto-specific weakness, according to Raoul Pal, founder and CEO of Global Macro Investor.
“The dominant narrative is that Bitcoin and crypto are broken and that the cycle is over,” Pal said on Sunday. He argued this interpretation is flawed, noting that Software-as-a-Service (SaaS) stocks have declined alongside crypto assets.
Bitcoin and SaaS stocks have recently moved in close correlation, both experiencing steep losses. Pal said this is significant because both are considered “long-duration assets,” meaning their valuations rely heavily on future growth, adoption, and cash flows, making them particularly sensitive to liquidity conditions and interest rates.
As a result, similar narratives have emerged across markets—claims that “crypto is dead” alongside arguments that artificial intelligence is rendering traditional software companies obsolete.
The synchronized movement of two fundamentally different asset classes, Pal said, points to a shared underlying cause: a contraction in macro liquidity, not problems unique to crypto or the technology sector.
“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 deepen liquidity squeeze
The temporary drain on U.S. liquidity has been intensified by two government shutdowns and what Raoul Pal described as “issues with U.S. plumbing.” Pal noted that the drawdown from the Federal Reserve’s Reverse Repo Facility (RRP) was effectively completed in 2024.
The RRP allows banks and money market funds to park excess cash overnight at the Federal Reserve. In the past, when the U.S. Treasury rebuilt its General Account (TGA), the resulting liquidity drain was partially offset by funds flowing out of the RRP. However, with the RRP now largely depleted, no such offset exists, meaning TGA rebuilds have become a direct and unmitigated drain on liquidity, Pal explained.
Pal dismisses concerns over Fed leadership
Jeff Mei, chief operating officer at crypto exchange BTSE, told Cointelegraph that the recent crypto decline reflects investor concerns that a new Federal Reserve chair, Kevin Warsh, may not cut interest rates as quickly or as aggressively as markets had anticipated, given his historically tough stance on inflation and quantitative easing.
Pal pushed back against that view, dismissing fears that Warsh would take a hawkish approach. He argued that Warsh’s role would be to follow a “Greenspan-era playbook,” prioritizing rate cuts while allowing the economy to run hot and relying on productivity gains from artificial intelligence to help contain inflation.
“Warsh will cut rates and do nothing else,” Pal said, adding that he would step aside to allow former President Donald Trump and Treasury Secretary Scott Bessent to drive liquidity through the banking system.
Pal concluded on an optimistic note, saying the current liquidity drain is nearing its end.
“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.”
