Bitcoin’s 40% Drop: Liquidity, Not Broken Crypto Cycle

The dominant story in financial media suggests Bitcoin’s collapse stems from exchange issues, institutional actions, or inherent crypto flaws—a view Pal labels an “alluring narrative trap.” He counters this by pointing to a powerful correlation: the price patterns of Bitcoin and the UBS SaaS Index have been nearly identical. This synchronicity, Pal asserts, indicates a common underlying driver affecting both asset classes, not isolated problems. That driver, he argues, is the availability of US dollar liquidity.

According to Pal, assets like Bitcoin and high-growth SaaS stocks are among the market’s longest-duration assets, meaning their valuations are heavily based on future cash flows or utility. This makes them exceptionally sensitive to changes in liquidity conditions. When liquidity is abundant, these assets thrive; when it contracts, they bear the brunt of the sell-off first and most severely. The parallel decline thus serves as a key diagnostic, shifting blame from the assets themselves to the financial environment in which they trade.

Pal identifies a sequence of technical and fiscal events that have conspired to tighten US liquidity. The process began with the completion of the Reverse Repo facility drain in 2024, which removed a source of short-term funding. This was followed by rebuilds of the US Treasury General Account (TGA) in July and August. Critically, these TGA increases—where the Treasury parks cash—were not offset by new liquidity injections from the Federal Reserve, effectively pulling money out of the financial system.

The situation was exacerbated by the recent US government shutdown. Pal notes the Treasury did not draw down the TGA to fund operations during the shutdown, as might be expected, but instead added to it, intensifying the liquidity withdrawal. He characterizes this combined effect as a temporary “air pocket” that has created severe price pressure across risk assets. Furthermore, Pal highlights that a rally in gold has absorbed marginal liquidity that might otherwise have flowed into riskier sectors like crypto and tech, leaving insufficient capital to support all markets simultaneously.

While Global Total Liquidity has a strong long-term correlation with markets, Pal emphasizes that US Total Liquidity is currently the primary lever because the United States remains the core source of global dollar funding. He observes that global liquidity has already begun to turn higher this cycle, a trend he expects will eventually feed through to improve US liquidity conditions and economic indicators like the weak ISM readings.

Despite the current turmoil, Pal’s outlook is not one of prolonged doom. He describes the government shutdown as likely the “final major liquidity obstacle” and expects its resolution to provide relief. Looking ahead, he reiterates that several potential liquidity catalysts remain on the horizon. These include adjustments to banking regulations like the enhanced supplementary leverage ratio (eSLR), partial drawdowns of the rebuilt TGA, new fiscal stimulus measures, and, ultimately, interest rate cuts from the Federal Reserve.

Pal also directly addresses market fears that incoming Fed leadership could adopt a more hawkish stance, dismissing such claims as based on outdated commentary. He believes the policy direction will align with measures supporting economic expansion and rate cuts, albeit within the constraints of banking system reserves. This perspective reinforces his view that the current squeeze is a phase, not a permanent regime.

Concluding with a long-term bullish stance, Pal states he remains strongly optimistic for 2026. His analysis frames Bitcoin’s dramatic correction not as a signal of a broken asset class, but as a severe stress test imposed by a transient US dollar liquidity crisis. The recovery, in his view, will be catalyzed by the very liquidity factors that are currently in short supply, setting the stage for the next phase of the cycle once this temporary “air pocket” is traversed.