Raoul Pal links crypto selloff to tightening US liquidity

Pal argued that the simultaneous weakness in Bitcoin and software-as-a-service stocks weakens the idea that a sector-specific narrative is doing the damage. In the explanation he shared publicly, two unrelated asset classes moving together points to a common constraint: liquidity, not a sudden change in crypto fundamentals.

He also linked the move to cross-asset competition for marginal dollars, saying the rally in gold pulled liquidity away from riskier assets. In his words, the system did not have enough incremental liquidity “to support all these assets,” leaving the riskiest pockets exposed as conditions tightened.

A key part of his macro argument centers on cash management dynamics around the US government and money markets. Pal said the liquidity drain has been amplified by two government shutdowns and stresses in the “plumbing,” pointing to the interaction between the Treasury’s cash balance and the Federal Reserve’s reverse repo facility.

In practice, the Federal Reserve’s overnight reverse repo operations (ON RRP) provide a place for eligible counterparties to park cash overnight via a reverse repurchase agreement, a mechanism the Fed describes as selling a security with an agreement to buy it back the next day. The effect, while the transaction is outstanding, includes a reduction in reserve balances and a corresponding increase in reverse repo obligations.

Pal’s point is that earlier Treasury cash rebuilds could be partially offset when money sloshed out of the reverse repo facility. With that cushion largely exhausted in his telling, rebuilding Treasury cash becomes a cleaner liquidity withdrawal from the system rather than a reshuffling across Fed liabilities.

Liquidity narrative has also been competing with a separate rates story. A market participant quoted in the same coverage attributed the drop to expectations that a new Federal Reserve chair — Kevin Warsh — might not cut rates as quickly as investors anticipated. Pal dismissed that as the main driver, arguing that the policy mix would still lean toward easing and bank-led liquidity, and he framed the current phase as a temporary drain nearing completion.

The upshot is a macro-first interpretation of crypto’s drawdown: Bitcoin behaving like a liquidity-sensitive, duration-heavy asset during a brief squeeze, rather than a market repricing driven by a new crypto-specific failure mode.