How does macro liquidity dominate the financial cycle of the Crypto industry? And how should we predict?

Develop a reverence for common sense.

Written by: Beichen

The Crypto industry is cyclical, which is the most basic market common sense, but if you have not experienced several rounds of bull and bear markets, it is difficult to form awe of common sense.

And even if they have experienced the power of the industry cycle, few people can clearly explain what the so-called cycle refers to. They can only make judgments based on the most superficial bull and bear markets, so it is often hindsight.

The special feature of the Crypto industry is that it is an active market with a high degree of integration of emerging technologies and finance. Therefore, when we discuss the industry, it is easy to confuse market performance with technological development.

In the previous articles about Sui, it was explained that the cycle of the crypto industry is composed of a technical cycle and a financial cycle. These two cycles are not completely synchronized (the technical cycle is often half a beat faster than the financial cycle), but the rhythm is roughly the same. And pointed out that in terms of technology cycle, there is no clear technology trend (that is, narrative).

If Wall Street and Silicon Valley are the two engines driving the growth of the US economy, then the technology cycle and the financial cycle are also the two hearts of the crypto industry, providing a steady stream of blood to the industry, and the contraction and relaxation of the heart have obvious rules. **

This article tries to explain briefly what the financial cycle of the crypto industry is all about.

The two leading factors of the financial cycle

The two most critical factors that determine the financial cycle of the crypto industry are macro liquidity and Bitcoin halving.

The crypto industry, which stands at the forefront of finance and technology, is far from the stage of generating endogenous profits. People investing in the crypto industry are essentially buying an out-of-the-money option, and the return when it reaches the strike price in the future The odds are like winning the lottery.

Therefore, the crypto industry at this stage is mainly funded by the external financial market based on its bright future, rather than a gold mine with proven reserves (there is no uncertainty in this).

In addition, the halving of bitcoin mining rewards every four years will also create scarcity and increase the price of bitcoin, thereby driving the market value of the entire crypto industry.

However, the bull market after the three halvings in history was not entirely brought about by the halving, but just coincided with the rise and fall cycle of the external financial market. And Bitcoin's fourth halving is still a year away, it won't play out so soon.

Since the financial prosperity of the industry is mainly closely related to external liquidity, we will only talk about macro liquidity today. So how is the liquidity of the external financial market transmitted to the crypto industry step by step, and what factors determine the macro liquidity?

This requires us to overlook the panorama of the crypto industry, and follow its operating logic to specifically analyze a certain territory (for example, Bitcoin and Dogecoin cannot be analyzed with the same logic), in order to be able to see clearly.

Of course, no one person can know the whole picture, and there must be new changes brewing in some obscure corners.

How external liquidity floods into the crypto industry

Let's first use words to describe a rough industry picture, you can use it as a txt text for your reference, welcome to scribble and modify it!

Any ecosystem is composed of many species, and there are several ecological niches between species and ecology, and species occupying the same ecological niche have the same functional status.

The same is true for the Crypto industry. ** Different people occupy different ecological niches, and try their best to expand their living space, forming a "multi-dimensional space resource" that is nested and competitive with each other. **

People stand in different ecological niches and see completely different scenes, and they selectively or even embellish what they see (like a filter) out of their own interests. platform, and distributed to everyone in a fragmented manner again, it's hard not to be a severely distorted reality distortion field.

Therefore, when external liquidity flows into the crypto industry, it is not that the rain and dew are uniform, but that different niches in the ecosystem receive different amounts of precipitation. **First, the upstream and downstream transmission chains of the industry determine the order of rise, and second, the prejudice (cognition and taste) of liquidity users determines that the funds in their hands will flow to different fields. **

The dollar liquidity plays a decisive role in the global financial market, and the source of the dollar liquidity is the Federal Reserve, which controls the rhythm and strength of the contraction and relaxation of the global financial market liquidity like a heart.

The Federal Reserve’s quantitative easing (QE) policy will release abundant liquidity, which will be transmitted layer by layer to the crypto industry to form an industry bubble, and then suddenly burst when the liquidity tightens until the next round of quantitative easing starts. This is the most fundamental aspect of the crypto industry. financial cycle.

**The first external liquidity to enter the market must be financial institutions that have long been concerned about frontier industries, and the last are retail investors. **But no matter who they are, they entrust their money to people they can understand and trust, rushing in from the primary and secondary markets.

Of course, there is nothing wrong with entrusting an outsider to an expert to take care of it. The problem is that all expectations of earning excess returns in the short term can only be met by liars. Layman investors in different ecological niches have different perceptions and tastes, so this is a market segment for scammers. For example, Wall Street's money was entrusted to FTX, and the money of small businesses in the coastal areas of the mainland poured into PlusToken.

Although Leeks on Wall Street and Leeks in Shenzhen both paid tuition, the stories that made them pay their tuition must be different, just like toys for children and health products for the elderly.

What is the real vitality of the crypto industry?

Most of the influx of money from the outside is to pay tuition fees, because they do not have the ability to capture the value of the crypto industry, or even the ability to discern the level of the entrusting party (the real crypto-native narrative is beyond their cognition), so* *The first flow of their money must not be the core builder. **

But no matter whether it comes in through the primary market or the secondary market, the money has indeed come in, and more or less will overflow the ecological niche that was originally invested, and then circulate within the ecosystem, thereby promoting the rise of the entire industry and further attracting more money. Much money and people come in.

Until the external financial market changes, the funds in the crypto industry continue to lose in the liquidity crunch, and the first to leave must be those lifeless products, that is, story-type products purely to fool laymen.

This is the end of the description from the outside to the inside. Let's look at the industry picture from another direction, that is, the original logic and requirements of crypto, and the builder on it.

Satoshi Nakamoto was dissatisfied with the financial order of the real world and created Bitcoin. This is the first new continent in the crypto world. Many geeks who were dissatisfied with the real order came here after hearing the news. Later, many people felt that they were too bored to leave Bitcoin. To open up their own ideal new world, some settled down not far from Bitcoin, and echoed with Bitcoin (developed side chains), some people went further, and opened up new continents (public chains such as Ethereum).

But no matter which continent you build on, you must follow the logic of the crypto world (otherwise you don’t need to come here). In the past 14 years, the most basic public chain and the most basic application layer protocol based on the public chain have been built. (Although there are not many), it is still under construction from the bottom up.

These can survive to the construction of the next round of technology cycle, without exception, they are all products that have been reconstructed with crypto logic instead of moving existing Web2 products over (but this is the easiest way for laymen to understand of).

Because the original logic of crypto is too obscure for laymen, the external liquidity often flows to these builders after changing hands in unexpected ways (it may be VC who raised too much money and cannot spend it, or it may be Pure currency speculation), they use the money to accelerate their projects, and then fully blossom when the next round of liquidity is abundant.

That is to say, **now the crypto world has only been reconstructed from the bottom up to the stage of public chain and application layer protocol, which is far from being completed. **

How to predict the cycle of external liquidity

Like the heart, the Federal Reserve controls the rhythm and strength of the contraction and relaxation of liquidity in the global financial market, and it plays a decisive role in the financial cycle of the crypto industry.

After several rounds of bull and bear markets, there are fewer and fewer local dogs who think that the crypto industry can go against the macro cycle and go out of the independent market. The role of the industry, but I think the Fed will release water next (although the continuous downward market has been hitting the face for a year, but they are getting more and more courageous).

*PS: Just to add a word, in the past year (including now), any KOL who said that the bull market is coming, basically one can be blacked out. *

Although it is possible that Powell himself does not know how the pace of Fed rate hikes will develop next...but there are some basic common sense that will not be subverted.

The local dogs believe that continuing to raise interest rates will bring a liquidity crisis or even an economic crisis, but in fact there are many policy tools that can control liquidity (such as special rescue funds).

The Fed raised interest rates to reduce inflation (the reasonable level is 2%). This is a political issue related to social stability, and its importance is far higher than the economic growth claimed by the dog.

Although the interest rate has been raised radically since last year, it has only played a role in withdrawing liquidity from the risk market, and has not yet been transmitted to the stage of curbing inflation. What's more, compared with the epic scale of water release before the interest rate hike, this Just where to where.

And except for the core goal of reducing inflation, which is far away, the two indicators that make the Federal Reserve be wary of raising interest rates-non-agricultural employment and bank credit have not been affected, and it can even be said to be strong, because the unemployment rate is at the lowest level in half a century. level.

In a word: If there is no sign of economic depression, the Fed will not stop raising interest rates. Since there is no sign to support the Fed to stop raising interest rates, the expectation of interest rate cuts is even more delusional.

But what does this have to do with the crypto industry we are going to discuss?

Let me give you an example. Under the pressure of the Federal Reserve to raise interest rates, the interest rate of some bank deposits in Australia has reached 7%, which exceeds the income of many DeFi. If you were a big money holder, where would you choose to put your money?

*PS: One more sentence, one of the reasons for the outbreak of DeFi Summer in 2020 is that bank deposit interest rates were generally close to 0 at that time. *

So whether it is from the perspective of entrepreneurship or investment, if you do not have the ability to tell a story to a certain market segment to cheat tuition fees or discover stories in time to earn tuition fees for the next wave of people (the most recent example is BRE-20), Then don't fight against the long-term trend, try to keep the principal, and update your industry cognition, waiting for the next round of technology cycle and financial cycle.