A significant downturn in the cryptocurrency market saw approximately $250 billion wiped off its total value over the weekend. This sharp sell-off is attributed to tightening liquidity in the U.S. financial system rather than inherent weaknesses within the crypto ecosystem, according to Raoul Pal, founder and CEO of Global Macro Investor.
Pal contested the narrative suggesting that both Bitcoin and the broader crypto market are “broken.” He highlighted that traditional tech stocks, especially those in the Software-as-a-Service (SaaS) sector, have experienced similar declines, indicating that this is a macroeconomic issue rather than one limited to digital currencies.
The correlation between Bitcoin and SaaS stocks can be explained by their classification as long-duration assets. The valuations of these assets are significantly influenced by anticipated future growth and adoption rates. When liquidity contracts and interest rate expectations fluctuate, these assets typically suffer together.
Pal pointed to a recent surge in gold prices, which has absorbed much of the liquidity that would typically flow into riskier assets like Bitcoin and growth stocks. The lack of available liquidity has particularly impacted the riskiest assets, resulting in a severe market reaction.
Furthermore, Pal noted that recent temporary U.S. government shutdowns and ongoing financial system issues have exacerbated the liquidity crisis. He specifically mentioned the depletion of the Reverse Repo Facility (RRP), a tool used to manage excess cash overnight, which had been largely depleted by 2024. In previous instances, liquidity withdrawals from the market were offset by funds exiting the RRP. Now, with the RRP nearly empty, liquidity challenges have become more pronounced.
While some market players attribute the downturn to the potential appointment of Kevin Warsh as the new Federal Reserve chair, Pal dismissed these concerns. He argued that Warsh is likely to adopt a “Greenspan-style” approach, wherein he would cut rates while allowing economic growth to flourish, banking on advancements in AI to mitigate inflation.
Concluding on a positive note, Pal expressed optimism that the most severe phase of the liquidity squeeze may soon be coming to an end. This perspective suggests a potential stabilization in the market, which could provide a much-needed boost to the beleaguered cryptocurrency sector.
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The original article appears on DeFi Planet.
