Raoul Pal Uncovers Hidden Liquidity Strain Behind Bitcoin Drop

TLDR

• Raoul Pal stated that the recent Bitcoin sell-off is due to a U.S. liquidity crunch and not crypto market weakness.
• He explained that the Federal Reserve’s Reverse Repo facility was fully drained by 2024, reducing available liquidity.
• The Treasury General Account rebuild in mid-2024 had no monetary offset which further tightened liquidity conditions.
• Pal emphasized that U.S. government shutdowns have held back liquidity and created sudden drops in market support.
• He dismissed claims that political uncertainty about the Federal Reserve chair caused the downturn in Bitcoin prices.

U.S. macroeconomic factors have triggered a steep cryptocurrency sell-off, according to finance expert Raoul Pal, founder of Global Macro Investor, who explained that constrained liquidity, not crypto market weakness, caused the downturn, driven by monetary tightening and U.S. government shutdowns.

TGA Rebuild and Reverse Repo Drain Spark Shock

Raoul Pal attributed the liquidity shortage to a chain of overlooked financial operations involving U.S. Treasury mechanisms and central bank policies. He pointed out that the Federal Reserve’s Reverse Repo facility, a liquidity source, was depleted by 2024, which removed a key buffer. “The drain of the Reverse Repo was essentially completed in 2024,” he wrote in a post on X.

Furthermore, the Treasury General Account (TGA) rebuild during mid-2024 lacked any monetary offset, causing a deeper impact. This increased pressure on market liquidity just as other mechanisms dried up, worsening the sell-off environment. Pal stressed that this combination caused what he described as a sudden “air pocket” in market support.

He emphasized that these are structural funding issues, not weakness in the crypto ecosystem itself.

These conditions left little room for market recovery or risk-on sentiment, which is required for Bitcoin and other assets to rebound.

Bitcoin Feels the Impact as U.S. Liquidity Tightens

Bitcoin has become vulnerable to changes in liquidity, particularly when global liquidity sources like the U.S. start to contract. Pal explained that in this current phase, the U.S. is the primary liquidity driver and it is “now restricted.” Therefore, risk assets like Bitcoin are the first to react when liquidity gets drained.

Pal dismissed suggestions that politics, such as Trump’s preference for Kevin Warsh at the Fed, have driven the current slide. Instead, he claimed, “Warsh will cut rates and do nothing else,” underlining that monetary policy will reflect broader political directions. He added that policy direction will flow from Donald Trump and Treasury Secretary Scott Bessent, not directly from the Fed chair.

Long-duration assets, including Software as a Service (SaaS) stocks and Bitcoin, are highly sensitive to liquidity conditions. Pal warned that as liquidity pulled back, Bitcoin’s valuation corrected quickly. He noted that with insufficient liquidity to support all asset classes, high-risk options bore the initial losses.

Shutdown Effects and Gold’s Role in Liquidity Drain

Recent U.S. government shutdowns also played a crucial role in intensifying liquidity stress. Pal explained that during the latest shutdown, the Treasury chose to add to the TGA instead of drawing it down. This action further removed available cash from the system, extending the liquidity squeeze.

Pal referred to this moment as creating an “air pocket” in markets, where price corrections became more severe. He argued that this unexpected strategy shifted liquidity away from risk markets like crypto. It left Bitcoin with less support, causing abrupt declines and increased volatility.

Meanwhile, gold has absorbed what little marginal liquidity was left in the system. Pal noted that this diverted capital away from Bitcoin and other long-duration assets. He explained this shift helped reduce support for higher-risk instruments during this liquidity tightening phase.

Pal concluded that while these disruptions have been severe, the worst may be nearly over. He suggested that the shutdown issue may resolve very soon, restoring some market stability. Until then, constrained liquidity will remain a central pressure point.

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