Don't judge the crypto market simply by "bulls and bears," pay attention to changes in liquidity and supply

Author: Rancune

Compiled by: Deep Tide TechFlow

This might be one of the most important posts I've made so far. Many people might miss the "bull market." Will you? Many here think very linearly, only considering bear markets or bull markets - one-dimensional; prices either go up or down. This perspective has unsettled me for a long time (please refer to the showcase in the first reply). Today, I present a new conceptual model that I believe:

a) Provides a fresh perspective on cycles,

b) Helps us better understand the current situation,

c) Is actionable.

Dimensions

Liquidity in the system | Cryptocurrency is harder to access than traditional finance, lacking maturity in efficiency, capital inflow, stablecoin availability, and centralized exchange accessibility. Especially now, Bitcoin and Ethereum have traditional financial guardrails, but these guardrails do not trickle down, and the rules of the game have changed.

Scarcity of tokens | Supply is a major factor in cryptocurrency; it determines the dispersed denominator of available liquidity. This is different from traditional finance, where the number of tokens is naturally limited, usually requiring an IPO, rather than rushing to Pumpfun after hearing a word in a Twitter Space.

According to my theory, we skyrocketed from low liquidity and low supply to high liquidity and low supply ("Bull Market Feast") in 2021. After that, we crashed, ultimately falling into the "Bear Market Wasteland" in 2022. Many call it a bear market, characterized by low supply and low liquidity. The similarity between the Bear Market Wasteland and the Bull Market Feast is that due to low supply, tokens rise (or fall) consistently. The market is moving, but the narrative is not necessarily moving (although they clearly exist, they usually last much longer than our current 15-minute meta-narrative).

Slowly recovering from the damage caused by FTX and the impact of FTX's liquidation on the ecosystem, liquidity has slightly increased, but token supply has increased even more. Those who are easy prey have exited the game, leaving behind experienced (and malicious) participants whose extraction infrastructure is already established and in place to extract more.

Starting in 2023, we entered the "Consumption Arena," where we cannot benefit from higher liquidity because token supply is growing exponentially. It really is survival of the fittest; the most skilled individuals (or those with the best connections/more insider information) win. Others become bag holders.

We often attribute token growth to Pumpfun and Solana junk coins, which is obviously true, but not limited to that. It also includes the sheer number of useless L1s, L2s, rollups, AI protocols, bridges, etc. Clearly, we need forks of everything, and we absolutely need more L2s that lack organic trading volume and are venture-capital funded. This is what I wrote about in showcases b and c.

In my experience, every time we expand in the cryptocurrency space, there is a contraction phase that follows. There will be a shift towards quality assets, whether in altcoins or meme coins.

With the increase in liquidity, my expectation for the next 6-18 months is that we will enter a rotation phase. We will gain some benefits from increased liquidity, but only limited to specific narratives and operations. Most holders will continue to hold their stagnant or slowly bleeding tokens indefinitely, reflecting back after Bitcoin oscillates around six figures: Did I miss out?

We will no longer have the kind of Bull Market Feast that everyone associates with "bull markets" after 2021. This is impossible because the skills of token issuers have matured (whether it's your favorite PF scammer or a venture capital trying to extract liquidity from another meta-narrative).

But how do we operate in the rotation phase? I will delve into this question in the next article.