The liquefaction mechanisms of the algal biomass to bio-oil were investigated by using Fourier transform infrared spectroscopy, X-ray diffraction, and scanning electron microscopy, respectively. It was found that NaOH was a satisfactory catalyst and contributed to helping the liquefaction of algal biomass. The bio-oil from algal biomass was composed of many compounds, including carbohydrates, alcohol, hydroxybenzene, carboxylic acid, alkene, ester, and others. The mechanism of hydrothermal catalytic liquefaction was discussed. It was found that, comparing with the husk biofuel, the algal bio-oil as a promising alternative fuel was more close to the traditional diesel fuel in physicochemical properties. The novel research outcomes contribute to improving the yield of bio-oil from microalgae, reducing the cost of the bio-oil and accelerating the commercial application of the algal bio-oil in the near future.