The disappearing liquidity... Is the avalanche coming?
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The disappearing liquidity... Is the avalanche coming?
The market is currently in a state of very thin liquidity, where even a small upward or downward force can cause significant volatility.
Navigating Web3 tides with focused insightsRecent market volatility has been intense, inevitably causing a sense of unease. Many friends have been asking me about my views on the current market and priorities for 2025. My responses are always cautious and hesitant. Market opinions are deeply divided—some believe we're in a bull market, while others think a bear market has already arrived. Behind this stark divergence, I believe the disappearance of liquidity has made broad-based gains across cryptocurrencies impossible. The fragile scene of other tokens plunging after $Trump's launch is precisely a reflection of insufficient liquidity. So where has the liquidity gone? Is it being drained by the endless stream of memes on pump.fun, or is it being sucked away by vampire attacks from $Trump+$Melania’s in-law coins? I believe the deeper reason lies in the complex interplay of macroeconomic and geopolitical factors.
Arthur Hayes’ "The Ugly"
I recommend@CryptoHayes's blog post "The Ugly," published in mid-January. This richly detailed article covers topics ranging from Trump’s new policies and the yield on U.S. 10-year Treasury bonds to geopolitics, packed with dense insights. Though lengthy, the writing is vivid, witty, and humorous—well worth reading. I first heard of Arthur Hayes because of GMX, then again because of Ethena, both of which I researched extensively. The third time was a brief encounter with Arthur at Niseko, where he mentioned skiing down Mount Yotei, which left me utterly shocked 😱. I even asked my ski instructor if we’d need a helicopter; he said no, but that we’d have to carry our gear and hike up for six hours. GMX + Ethena + Mount Yotei—all of it convinced me this guy is truly impressive.
In his article, Arthur expresses concern about the market and has reduced Maelstrom’s cryptocurrency holdings. Current market signals remind him of the period just before the crypto market collapse at the end of 2021. While he doesn’t believe the bull market is over, he expects Bitcoin is more likely to retrace to between $70,000 and $75,000 before rising to $250,000 by year-end. Actually, back in November last year, when chatting with some friends, we all thought the market would pull back significantly after Trump took office—but the subsequent AI + meme-fueled bull run lulled everyone into complacency.
From Frenzied Bull Run to Vanishing Liquidity—What Exactly Happened?
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The Trump administration may want to create a small economic crisis early in its term to blame on the Biden administration, while pressuring the Fed to cut rates or restart money printing. Prior to that, the yield on U.S. 10-year Treasury bonds could rise to 5%, triggering deleveraging and tightening liquidity in the market.
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The Bank of Japan raised interest rates by another 25 basis points last month. While retail investors typically don’t pay much attention to the BoJ, historically every rate hike by Japan has had notable market impacts. In 2000, after ending its zero-interest policy introduced in 1990, the BoJ hiked rates only to face the burst of the U.S. dot-com bubble, forcing it back into zero rates. In July 2006, the BoJ began hiking twice, followed by the U.S. subprime mortgage crisis in 2007. In 2024, Japan restarted its hiking cycle, raising rates twice by January this year—the future market impact remains to be seen. Due to the long-standing low interest rates in yen, there has been significant carry trade activity. Rate hikes increase the cost of these trades, leading to unwinds that substantially drain market liquidity.
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Although Arthur believes China’s recent currency-stabilizing measures during the Lunar New Year also affected overseas liquidity, I personally think China’s influence is limited unless a full-blown trade war erupts between China and the U.S.
Will Bitcoin Drop to $75,000?
Put differently, if rising interest rates further tighten liquidity, who will sell?
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Macro factors: If market volatility and concerns over a “mini financial crisis” intensify, triggering widespread risk aversion, investors (such as ETFs) may dump risk assets including Bitcoin.
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Technical selling: Joe McCann, founder of Asymmetric, believes there's a significant gap in Chicago Mercantile Exchange (CME) Bitcoin futures contracts around $75,000, suggesting a potential short-term drop in Bitcoin price. (Honestly, I don’t fully understand this 😅)
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Liquidation events: Market downturns could trigger cascading liquidations, leading to panic selling.
Looking at MicroStrategy, their average purchase price for Bitcoin is around $63,000. If Bitcoin retraces to $70,000, MicroStrategy’s overall position—including BTC holdings, borrowing costs, and convertible bond expenses—would come under pressure.
The market is currently in a state of extremely thin liquidity, where even minor upward or downward forces can cause large swings. I continue to adhere to the 60/40 asset allocation principle. In the current market environment, staying cautious, managing risks, and waiting for the right moment to buy the dip 😃.
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