Crypto Market Loses $250B as Liquidity Crunch Drives Risk Asset Sell-Off

The crypto market suffered a sharp downturn over the weekend and shed around $250 billion in total market cap as selling pressure intensified. The Crypto Fear and Greed Index fell into extreme fear territory, a level last seen in November last year.

The decline comes amid broader weakness in global risk assets and tightening financial conditions.

Raoul Pal, founder and CEO of Global Macro Investor, argues that the latest drawdown is because of a shortage of US dollar liquidity rather than structural problems in the crypto market. Speaking on Sunday, Pal rejected claims that Bitcoin and crypto have reached the end of their cycle.

Liquidity shortage, not crypto specific weakness

Pal pointed to the recent performance of Software as a Service stocks, which have declined alongside Bitcoin. Both asset classes have shown strong correlation in recent months, falling sharply during the same periods. 

According to Pal, this is notable because Bitcoin and SaaS stocks are both long-duration assets, meaning their valuations depend heavily on expected future adoption and cash flows.

As a result, both sectors are highly sensitive to changes in liquidity conditions and interest rate expectations. Pal said the same negative narrative has appeared in both markets. Notably, investors are claiming crypto is finished while also arguing that artificial intelligence is replacing traditional software firms.

Gold rally and US liquidity drains add pressure

Pal added that the strong rally in gold has absorbed much of the remaining marginal liquidity in the system. With limited capital available, investors have reduced exposure to higher risk assets first, including crypto and growth oriented equities.

He also highlighted technical pressures within the US financial system. According to Pal, temporary liquidity drains have been worsened by two government shutdowns and ongoing issues with US Treasury operations. The Reverse Repo Facility, which previously absorbed excess cash from banks and money market funds, was largely depleted in 2024.

In the past, when the US Treasury rebuilt its General Account, liquidity pressure was offset by funds leaving the reverse repo system. With that buffer now gone, Treasury cash rebuilding has become a direct drain on market liquidity.

Some analysts also point to shifting expectations around US monetary policy. Investors are also worried that potential new Federal Reserve chair Kevin Warsh may slow or limit interest rate cuts due to his firm stance on inflation and balance sheet policy.