Raoul Pal, CEO and founder of Global Macro Investor, has said that the ongoing cryptocurrency sell-off is driven by a tightening U.S. liquidity environment and constant government shutdowns, not structural weakness of the crypto market.
In a recent post on X addressing ‘the big narrative’ that ‘the crypto cycle is over,’ the finance veteran called this combination of factors financial ‘plumbing.’
As examples, Pal cited the drawdown of the Federal Reserve’s Reverse Repo facility, which was largely completed in 2024 and the rebuild of the Treasury General Account (TGA) last summer, which had no monetary offset.
‘There is another factor at play that we have all missed… That factor is that US liquidity has been held back due to the 2 shutdowns and issues with US plumbing (the drain of the Reverse Repo was essentially completed in 2024). The TGA rebuild in July and August therefore had no monetary offset. The result was a drain in liquidity…’ Pal wrote.
Pal also dismissed claims that the downturn is due to uncertainty surrounding President Donald Trump’s reported vote for Kevin Warsh as Federal Reserve chair. While Warsh has been known as ‘hawkish,’ meaning he would be reluctant to cut interest rates, Pal rejected that view outright.
‘Warsh will cut rates and do nothing else,’ he wrote, adding that liquidity policy would ultimately be driven by Trump and Treasury Secretary Scott Bessent through the banking system.
The connection between Bitcoin and the U.S. economy
While Global Total Liquidity usually has the strongest long-term correlation with Bitcoin (BTC) and the NASDAQ, the finance guru explained that the U.S. Total Liquidity is actually the dominant driver in this phase of the cycle. After all, the U.S. remains the primary source of global liquidity, and right now it is restricted.
Software as a Service (SaaS) and Bitcoin are both long-duration assets. When liquidity retreats, those are the first to be repriced. The recent rally in gold has absorbed marginal liquidity that would otherwise have supported higher-risk assets. With insufficient liquidity to support everything, risk assets paid the price.
Yesterday’s U.S. government shutdown was another key factor. This time, Treasury preemptively avoided drawing down the TGA and instead added to it, extending the liquidity drain. This has created what Pal dubbed an ‘air pocket’ in the market, and it explains the severity of recent price action, most notably in crypto.
The silver lining, however, is that this appears to be the final major liquidity hurdle. Signs point to the shutdown being resolved imminently. Once the problem is out of the way, liquidity will return.
Featured image via Shutterstock
