Today I had a chat with a friend about the liquidity crisis facing the Crypto market. I shared some of my thoughts in a tweet. Welcome friends to discuss more 👇👇
Compared to the bear market cycle last year, from a macro perspective, liquidity has not improved significantly. It is still in a high interest rate cycle, and the high cost of funds will inevitably affect the valuation and liquidity of risk assets. This is why we have seen few instances of large funds increasing several times or even tenfold in this cycle, and the stimulus for the bull market is not as strong as imagined.
A special case is Bitcoin: #Bitcoin
BTC has had two milestone events this year: the approval of ETFs and the halving of production. The former continuously brings liquidity from US stock funds to BTC, and the latter brings a medium to long-term expectation of an increase in BTC. So after the market Price in, we saw BTC break through its historical high, while similar blue-chip tokens such as SOL and ETH have not been able to break through or even approach their historical highs. The fundamentals of BTC are very good, and the fact that the fundamentals are bullish and liquidity is increasing is evident. However, the liquidity that comes into BTC from the ETF has an awkward point in that it will only stay at the level of BTC price and will not bring about an increase in overall liquidity in the Crypto market, which is completely different from the liquidity effect of the large-scale easing entering a low-interest rate cycle in 2021.
The ETF brings buying pressure from US stock users to Bitcoin, but most of this liquidity is in the hands of large institutions. After the institutions sell BTC-ETF, they will come to CEX to purchase Bitcoin spot to ensure that the spot exposure is zero. This part of the liquidity inflow will obviously bring about a substantial increase in demand for Bitcoin, thereby bringing about a rise in the price of the coin. However, the operations of institutions are basically limited to this. Based on compliance, the money will stay in BTC and will not go to other tokens or chains, further bringing about the prosperity of the overall ecosystem.
The vast majority of the gains from the rise in the price of Bitcoin will be taken by Bitcoin whales and miners. Most of these profits will be directly converted into stablecoins, or they will maintain BTC spot to maintain a floating profit state, rather than entering the Crypto ecosystem, buying ETH, SOL, or entering the chain. This is related to the emphasis of miners on cash flow and the preference of large BTC holders for coin-based values. At the same time, the unhealthy state of the Bitcoin DeFi ecosystem is also a very important reason. BTC spot funds cannot be converted into more easily circulated altcoins or stablecoin liquidity through efficient decentralized financial tools to enter the market.
For retail investors who are more focused on high returns, the vast majority of retail investors do not have a large reserve of Bitcoin, so the market has not seen a lot of Bitcoin selling liquidity being converted into buying pressure for other tokens. Therefore, we see the price of BTC against ETH continue to rise.
In summary, Bitcoin has obtained excellent liquidity supplementation due to the approval of the ETF, but this liquidity has not overflowed to other tokens and on-chain ecosystems.
In the future, I believe there will be three macro events that will truly bring about significant improvements in Crypto liquidity in the next year or two:
The approval of ETH ETFs. The vast majority of retail investors do not have Bitcoin, but many have ETH. If ETH ETFs can be approved, the influx of funds from the US stock market will push up the price of ETH, and this part of the gains will definitely be transferred to other blue-chip tokens and the EVM ecosystem. For example, after making money on ETH, users will choose to take some profits and buy other blue-chip tokens on the EVM; the rise in the price of ETH will increase the overall on-chain TVL, bringing about a double gain in trading volume and liquidity. The approval of SOL ETFs will also have the same effect.
The development of the BTC ecosystem, especially the DeFi ecosystem. If Bitcoin can have a native DeFi ecosystem, or if Layer2 based on EVM compatibility can bring real on-chain usage scenarios and users to BTC. In the future, we can see that compared to miners and large holders leaving BTC in wallets without moving, they can have many secure and additional income-generating on-chain operation choices, so that the liquidity of Bitcoin can overflow into more Crypto markets, and through bridges and other infrastructure, further overflow the liquidity of the Bitcoin ecosystem to EVM, SOL, or other Blockchains.
The arrival of an interest rate reduction cycle, this is a truly huge wave 🌊 I am optimistic about the next interest rate reduction cycle, where BTC could reach tens of thousands of dollars. After all, it has already gained recognition from the Old Money in the US and Hong Kong, and is definitely the new digital gold of the era.
Stay at the table, this day will come.
Crypto #Bitcoin #ETH #SOL
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