Raoul Pal pushes back on the idea that cryptocurrency’s current decline signals a broken market cycle, arguing instead that bitcoin and high-beta risk are being hit by a temporary US liquidity air pocket related to Treasury cash management and government shutdown dynamics.
In a weekend after on The cycle is over’ – has become an ‘alluring narrative trap’, mainly because ‘prizes [are] puke every damn day. But Pal said a separate question from a GMI hedge fund client about the beaten SaaS stocks prompted him to recheck the data and reconsider the driver.
“What I discovered destroyed both the BTC story and the SaaS story,” Pal wrote. “SaaS and BTC are EXACTLY the same graph. Huh? That means there’s another factor at play that we all missed…”
Crypto Slide Due to US Liquidity Slump?
Pal’s answer is liquidity. He argues that U.S. liquidity is “being held back” by two shutdown periods and “U.S. sanitation issues,” adding that the drain on the Fed’s reverse repo facility is “essentially complete by 2024.”
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That, he said, left the Treasury General Account (TGA) rebuilding in July and August without the kind of compensation that would normally soften the impact and turn it into a net drain. In his story, the same lack of liquidity helps explain why macro activity measures have looked weak, writing that “lack of liquidity is why the ISM has been so low.”
While Pal said he typically follows global aggregate liquidity because of its long-term correlation with bitcoin and US technology, he argued that the US benchmark dominates this phase of the cycle because the US remains the system’s main liquidity provider. That matters, he said, because the assets most exposed to a liquidity withdrawal are long-term, high-volatility exposures — exactly where bitcoin and SaaS sit in many portfolios.
“These are both the longest-dated assets in existence, and both were discounted as liquidity temporarily retreated,” Pal wrote, tying their drawdowns to the same macro momentum rather than project-specific failures or a broken crypto “cycle.”
He also pointed to gold’s rally as an additional constraint on marginal flows. “The rally in gold has essentially sucked out all the marginal liquidity from the system that would have flowed into BTC and SaaS,” Pal said. “There wasn’t enough liquidity to support all these assets, so the riskiest ones were hit.”
Pal described the latest shutdown as a further headwind, claiming that the Treasury “hedged” by not withdrawing the TGA after the earlier shutdown, but instead “added more to it”, deepening the drain. That, he said, is the “current air pocket” behind the “brutal price action” on the risk front.
But he also argued that the pressure is almost gone. “However, the signs are that this shutdown will be resolved this week and that is the FINAL liquidity hurdle cleared,” Pal wrote, adding that the next phase could bring a “liquidity flood” due to factors he listed including changes around eSLR, partial TGA cuts, fiscal stimulus and interest rate cuts.
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He extended the “false narrative” theme to Fed expectations and dismissed the idea that Kevin Warsh would lead policy like a hawk. “On the subject of rate cuts, there is still a false narrative going around that Kevin Warsh is a hawk,” Pal wrote. “It’s complete nonsense. These were comments from mainly 18 years ago.”
Pal argued that Warsh’s mandate would follow what he called the “Greenspan-era playbook” — cutting rates, letting the economy rise and leaning on productivity gains to curb core inflation — while avoiding balance sheet moves that could collide with reserve constraints and destabilize lending.
Pal added a mea culpa, acknowledging that GMI “did not see US liquidity as the current driving factor,” after years of emphasizing global measures. “There is no disconnect,” he wrote. “It’s just that the confluence of events, Reverse Repo, deflating the TGA rebuild > Shutdown > Gold rally > Shutdown, was beyond our prediction, or at least we missed the impact.”
His bottom line was less about determining the exact bottom and more about time in the cycle. “Often in these full cycle trades, time is more important than price,” he wrote, urging “PATIENCE!” and reiterates that he remains “HUGELY” optimistic about 2026 if the policy and liquidity scenario he expects materializes.
At the time of writing, BTC was trading at $77,510.
Featured image created with DALL.E, chart from TradingView.com