How does macro liquidity dominate the financial cycle of the crypto industry? And how should we anticipate it?
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How does macro liquidity dominate the financial cycle of the crypto industry? And how should we anticipate it?
Have reverence for common sense.
Navigating Web3 tides with focused insightsAuthor: Beichen
The crypto industry operates in cycles—this is basic market knowledge. However, without having lived through several full bull and bear markets, it's difficult to truly develop respect for this fundamental principle.
Even when one has personally experienced the power of industry cycles, few can clearly articulate what these cycles actually mean. Most people rely solely on the superficial distinction between bull and bear markets to make judgments, often realizing trends only after they’ve already begun.
What makes the crypto industry unique is that it’s a dynamic market where emerging technology and finance are deeply intertwined. As a result, when discussing the industry, we often conflate market performance with technological progress.
In previous articles about Sui, I explained that the crypto industry cycle consists of both a technological cycle and a financial cycle. These two cycles aren’t perfectly synchronized—the tech cycle typically moves half a step ahead of the financial one—but their rhythms generally align. I also pointed out that, from a technological standpoint, there is currently no clear dominant trend (or narrative) emerging.
If Wall Street and Silicon Valley are the two engines driving U.S. economic growth, then the technological cycle and the financial cycle are the two hearts of the crypto industry, pumping continuous vitality into the ecosystem, with a clear rhythm of contraction and expansion.
This article aims to concisely explain how the financial cycle in the crypto industry works.
The Two Key Drivers of the Financial Cycle
The two most critical factors shaping the financial cycle in crypto are macro liquidity and Bitcoin halving.
Operating at the frontier of finance and technology, the crypto industry has not yet reached a stage of generating internally driven, profit-based growth. Investing in crypto is essentially buying an out-of-the-money option—its potential return upon payoff is akin to winning the lottery.
Therefore, the current state of the crypto industry relies primarily on external financial markets injecting capital based on its promising future, rather than functioning like a proven gold mine with predictable yields (which lacks uncertainty).
Additionally, Bitcoin’s mining reward halves every four years, creating artificial scarcity that boosts its price and, in turn, lifts the overall market cap of the crypto industry.
However, historically, the bull runs following the three prior halvings weren’t solely caused by the halving itself—they coincided with broader financial market cycles. Moreover, Bitcoin’s fourth halving is still a year away and won’t take effect anytime soon.
Since the industry’s financial prosperity is closely tied to external liquidity, we’ll focus today solely on macro liquidity. How does liquidity from external financial markets flow into the crypto industry? And what determines macro liquidity?
To understand this, we need to zoom out and view the entire crypto landscape, then follow its operational logic to analyze specific segments (for example, Bitcoin and meme coins cannot be analyzed using the same framework), thereby gaining true clarity.
Of course, no single person can fully grasp the entire picture—there will always be overlooked corners quietly brewing new transformations.
How External Liquidity Flows Into Crypto
Let’s first sketch a rough textual map of the industry—an imperfect reference file you’re welcome to edit and improve!
Every ecosystem comprises multiple species occupying various ecological niches. Species within the same niche perform similar functional roles.
Crypto is no different: different participants occupy distinct niches, each striving to expand their survival space, forming a multi-dimensional structure of nested competition and interdependence.
People in different niches see vastly different realities. Driven by self-interest, they selectively—and sometimes exaggeratedly—share their perspectives (like filters). When these fragmented voices converge on public platforms and are redistributed in fragments, they inevitably create a severely distorted reality field.
Thus, when external liquidity enters the crypto industry, it doesn’t distribute evenly. Different niches receive varying levels of inflow. First, the industry’s supply chain determines the sequence of price increases; second, investors’ biases (their cognition and preferences) determine where their capital flows.
The most influential force in global financial markets is USD liquidity, which originates from the Federal Reserve—the central bank acting like a heart, regulating the rhythm and intensity of liquidity expansion and contraction across global markets.
The Fed’s quantitative easing (QE) policies inject abundant liquidity, which cascades down into the crypto industry, inflating bubbles. When liquidity tightens, those bubbles burst abruptly—until the next QE cycle begins. This is the fundamental financial cycle of crypto.
The first external liquidity to enter comes from institutional investors focused on cutting-edge sectors; retail investors arrive last. Regardless of who they are, investors entrust their money to people they understand and trust, entering via primary and secondary markets.
Entrusting professionals with funds is perfectly reasonable—but the problem arises when outsiders expect outsized returns in the short term, a promise only scammers can fulfill. Different outsider investor groups have different cognitive frameworks and tastes, creating segmented markets for fraud. For example, Wall Street money flowed into FTX, while small business owners from coastal China invested in PlusToken.
Though Wall Street and Shenzhen investors may both pay tuition, the stories that lure them differ completely—just as toys target children and health supplements target the elderly.
What Truly Gives Life to the Crypto Industry?
Most externally injected capital ends up paying tuition because these investors lack the ability to capture real value in crypto—or even assess whom they should trust. The true, native narratives of crypto lie beyond their comprehension. Therefore, their money rarely reaches the core builders first.
Yet whether entering through primary or secondary markets, this capital does flow in, spills over into adjacent niches, circulates within the ecosystem, fuels upward momentum, and attracts more capital and participants.
Eventually, when external financial conditions shift, capital drains from the crypto industry amid tightening liquidity. The first to vanish are products lacking vitality—purely story-driven projects designed to deceive outsiders.
With that outside-in perspective covered, let’s now look inward—at the native logic and demand within crypto, and the builders operating on that foundation.
Dissatisfied with the existing financial order, Satoshi Nakamoto created Bitcoin—the first new continent in the crypto world. Many disillusioned tech enthusiasts flocked here. Over time, some found it boring and left to build their ideal worlds: some settled nearby, echoing Bitcoin (creating sidechains); others ventured farther, founding new continents (like Ethereum and other public chains).
Regardless of which “continent” they build on, all must follow crypto-native principles (otherwise, there’d be no reason to come here). Over the past fourteen years, foundational public chains and basic application-layer protocols built atop them have emerged (though still limited), and construction continues bottom-up.
All projects that survive into the next technological cycle will have been reimagined through crypto-native logic, not merely copied from existing Web2 products (which are easiest for outsiders to grasp).
Because crypto-native logic is too obscure for outsiders, external liquidity often reaches these builders indirectly and unpredictably—via VCs flush with unspent capital, or traders who profited from speculation. Builders use this capital to accelerate development, preparing for full deployment during the next phase of ample liquidity.
In other words, the crypto world has only just progressed to the stage of bottom-up reconstruction of public chains and application-layer protocols—and even this remains far from complete.
How to Anticipate the Cycle of External Liquidity
The Federal Reserve acts like a heart, controlling the rhythm and intensity of liquidity contraction and expansion in global financial markets, playing a decisive role in the crypto industry’s financial cycle.
After repeated lessons from past bull and bear markets, fewer and fewer speculators believe crypto can defy macro cycles and generate independent rallies. But meme coin promoters haven’t disappeared—they’ve simply evolved. They now generally acknowledge the Fed’s influence but insist the Fed will soon ease (despite a year of downward price action proving them wrong—they remain undeterred).
PS: A quick note—over the past year (and still now), any KOL claiming a bull market is imminent can basically be blocked on sight.
Even if Powell himself doesn’t know exactly how the Fed’s rate hikes will unfold… certain basic truths remain unshaken.
Meme coin promoters argue continued rate hikes will trigger a liquidity crisis or even an economic collapse, but many policy tools exist to manage liquidity (such as targeted relief programs).
The Fed raises rates to combat inflation (targeting a 2% level)—a political issue tied to social stability, far more important than the growth concerns emphasized by meme coin advocates.
Although the Fed has aggressively hiked rates since last year, this has so far only driven capital out of risk assets, not yet significantly curbing inflation. Compared to the unprecedented scale of pre-hike monetary expansion, current tightening is still relatively modest.
Moreover, beyond the distant goal of inflation control, the two indicators that usually make the Fed cautious during hikes—nonfarm employment and bank lending—remain unscathed, even showing strength, with unemployment at its lowest level in half a century.
In short: unless signs of economic depression emerge, the Fed won’t stop hiking. Since no such signs currently exist, expectations of rate cuts remain pure fantasy.
But what does this have to do with the crypto industry?
Consider this example: under Fed rate pressure, interest rates on bank deposits in Australia have already reached 7%, surpassing many DeFi yields. If you’re a large-capital holder, where would you park your money?
PS: Another quick note—one reason DeFi Summer exploded in 2020 was that bank deposit rates were nearly zero at the time.
So whether you're building or investing, if you lack the ability to craft compelling narratives to extract fees from niche markets—or quickly identify such narratives to profit before the bubble bursts (a recent example being BRC-20)—then don’t fight long-term trends. Focus instead on preserving principal, upgrading your industry understanding, and waiting for the next technological and financial cycle to begin.
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