Liquidity Drought, Not a Crypto Collapse, Behind Bitcoin’s Recent Slide, Says Raoul Pal
February 1 2026
A sharp contraction in the crypto market that erased roughly $250 billion in total market value over the past weekend is being attributed to a broader shortage of U.S. liquidity rather than an intrinsic failure of digital assets, Global Macro Investor founder and CEO Raoul Pal argued on Sunday.
The market backdrop
Bitcoin and a swath of “long‑duration” assets, notably software‑as‑a‑service (SaaS) equities, have fallen in tandem this week. Pal pointed out that the parallel moves of these fundamentally different classes suggest a common denominator: a drying up of short‑term cash available to risk‑on investors.
“The prevailing story is that crypto is broken and the cycle is over,” Pal wrote on X. “But the same narrative is playing out in SaaS stocks, which have slumped alongside Bitcoin.”
Both Bitcoin and SaaS firms derive much of their valuation from expected future cash flows and adoption rates, making them especially sensitive to shifts in interest‑rate environments and the availability of liquid capital.
Macro forces at work
1. Gold’s rally and the liquidity squeeze
A recent surge in gold prices, Pal noted, absorbed much of the marginal liquidity that would otherwise have flowed into higher‑risk assets such as BTC and SaaS equities. With the “risk premium” assets left with a thinner pool of funding, the most speculative holdings were the first to feel the pressure.
2. US Treasury and the Reverse Repo Facility (RRP)
The United States has been running a temporary liquidity drain caused by two concurrent government shutdowns and what Pal described as “issues with US plumbing.” Historically, when the Treasury rebuilt its cash balance (the Treasury General Account, or TGA), the Federal Reserve’s Reverse Repo Facility helped offset the negative impact by soaking up excess cash from money‑market funds and banks.
However, Pal explained that the RRP was essentially depleted in 2024. With that safety valve gone, any further Treasury cash inflows now act as a pure drain on the financial system, leaving fewer dollars for risk assets.
3. Fed chair expectations
Some market participants, including BTSE COO Jeff Mei, have suggested that the market is reacting to the perception that the incoming Fed chair Kevin Warsh may adopt a more hawkish stance than anticipated, slowing the pace of interest‑rate cuts. Pal dismissed this view, arguing that Warsh will likely follow the “Greenspan‑era” playbook: cut rates while allowing the economy to run hot, relying on productivity gains from AI to keep inflation in check.
“Warsh’s job is to run the same playbook that worked in the 1990s. Rate cuts will continue, and the liquidity pipeline will be managed through the banking system,” Pal said.
Outlook and bullish sentiment
Despite the current squeeze, Pal ended on a more optimistic note, stating that the worst of the liquidity drain appears to be behind the market. He believes that upcoming policy actions, together with a better‑understood macro environment, will set the stage for a strong rally in 2026.
“We still have a clearer picture now, and we remain very bullish for 2026 given the expected policy trajectory.”
Key Takeaways
| Point | Implication |
|---|---|
| Liquidity shortage, not crypto fundamentals, drove the sell‑off | Bitcoin’s price drop mirrors declines in unrelated long‑duration assets, indicating a macro‑driven risk aversion. |
| Reverse Repo depletion removed a crucial liquidity buffer | With the RRP empty, Treasury cash inflows act as a net drain, tightening conditions for risk assets. |
| Gold’s rally absorbed marginal liquidity | The surge in safe‑haven demand left less capital for higher‑risk markets, intensifying the sell‑off. |
| Fed chair expectations are being reassessed | While some fear a hawkish stance, Pal believes Warsh will continue the traditional rate‑cut approach. |
| Long‑term bullish case remains intact | Pal expects the current liquidity constraints to ease, supporting a positive outlook for Bitcoin and other risk assets through 2026. |
Analyst perspective
The episode underscores how tightly intertwined crypto markets have become with broader financial conditions. As more institutional capital flows into digital assets, their price dynamics increasingly reflect traditional macroeconomic levers—interest rates, central‑bank facilities, and fiscal cash management—rather than sector‑specific narratives.
Investors should therefore monitor U.S. Treasury cash flows, the status of the Reverse Repo Facility, and Fed policy signals as key indicators of short‑term liquidity risk. In the longer run, Pal’s confidence suggests that once the liquidity bottleneck eases, the same macro drivers that have historically buoyed risk assets could reignite a strong upside for Bitcoin and its peers.
Source: https://cointelegraph.com/news/liquidity-drought-hurting-crypto-markets-raoul-pal?utm_source=rss_feed&utm_medium=feed&utm_campaign=rss_partner_inbound
