“Bitcoin and crypto are broken. The cycle is over. It’s all [expletive], and we can’t have nice things,” are some of the narratives that have dominated the market with the prevailing bearish conditions.
Pointing out that this is not a problem specific to crypto only but with long-duration assets, which included the SaaS (Software as a Service) market, an analyst stated that the lack of liquidity was the main catalyst for this market condition.
Bitcoin has crashed below $77K; the total crypto market has also crashed to $2.5 trillion, while the market sentiment has gone into the fear zone. Amidst these very disturbing conditions, there are many negative narratives being sewn together.
“The big narrative is that BTC and crypto are broken. The cycle is over.” are false narratives, according to CEO of Global Macro Investor Raoul Pal. After deep research, Pal figured out that the narrative about crypto was false, as it was not just the crypto market that was suffering, but even the SaaS stocks were hit. The overall long-duration assets, which mature after a while, suffered.
Upon further scrutiny, Pal figured out that it was a liquidity drain that caused the market to crash. Pal’s search result dates back to 2024, when there was a problem with the US plumbing. The Treasury General Account (TGA) did not offset the funds it got from the market after completing Reverse Repo in 2024.
Fed fails to offset borrowed funds
A reverse repo is a process where the Federal Reserve borrows money from banks and money market funds by selling treasury bonds, which are later bought back by the Fed, injecting cash flow back into the market. However, after borrowing funds from the market, in 2024 the Fed did not offset it.
When the liquidity in the market dries up, investors try to sell these long-duration assets, as they are concerned about future interest rates. With less liquidity, there are fewer buyers, and the demand for the asset drops drastically.
Kevin Warsh may alleviate conditions
This is actually what happened to crypto and the SaaS market. Even the liquidity in the market was used for investing in safe havens like gold and silver, further dehydrating the market.
However, things will get better as Pal expects the new Fed chairman, Kevin Warsh, to follow the Greenspan-era playbook, which encourages rate cuts to increase the liquidity in the market.
