The phone notifications kept flashing in the early morning as the price of Bitcoin slid to $85,000, and the crypto community was in an uproar, while I, a ten-year veteran in the game, couldn't help but laugh.
Just on Monday, Bitcoin briefly plummeted to $85,154, down about 30% from its historical high of $126,000 in early October. In the past 24 hours, over 147,000 investors were forced to liquidate their positions, with the total liquidation amount across the network reaching $468 million.
The community is filled with wails of 'institutional harvesting' and 'the bear market is here.' But to me, this is not some black swan event; it is the inevitable result of two 'capital extraction machines' operating at full speed—newbies who understand this mechanism can actually seize rare opportunities.
01 What the market truly fears is not the decline, but the disappearance of liquidity.
Does today's crash feel familiar? Indeed, this is not a phenomenon unique to the cryptocurrency market, but an inevitable result of tightening global liquidity.
The U.S. Treasury's 'debt vacuum cleaner' is operating at full speed. To fill the TGA account, the U.S. Treasury is issuing bonds on a large scale, which directly pulls liquidity out of the market. When investors purchase these bonds with cash, funds flow from the financial system into the Treasury's account, causing market liquidity to tighten sharply.
More critically, this time the market lacks a cushion. The balance of the Fed's reverse repurchase tool, which once served as a 'buffer', has fallen from $2 trillion to a negligible level, making this liquidity withdrawal more direct and severe.
The Fed's 'expectation vacuum cleaner' is also at work. Although the Fed cut interest rates last week, the officials' vague statements about the subsequent path disappointed the market. The market hates uncertainty, and this expectation management has effectively tightened financial conditions further.
The crypto market is exceptionally sensitive to changes in liquidity because it heavily relies on stablecoins as a 'cash track'. When liquidity tightens, the supply of stablecoins may shrink, leading to a general decline in cryptocurrencies.
02 Historical data reveals survival rules in liquidity crises
In such a market, panic is the most common mistake made by novices. Looking back at historical data, you will find some interesting patterns.
In a similar liquidity tightening environment, Bitcoin often outperforms other cryptocurrencies. In 2023, when stablecoin supply decreased by 4.15%, Ethereum fell by about 13%, while Bitcoin's price remained relatively stable.
This differentiation has already manifested in the current market: Bitcoin's dominance has actually rebounded recently, showing that funds are migrating from altcoins to Bitcoin as a 'safe haven'.
Liquidity tightening usually has stage characteristics. According to historical data, the most severe phases of liquidity pressure often last for several weeks, and once the TGA account target is met and bond issuance slows down, the pressure will ease.
The current expectations for a potential interest rate hike by the Bank of Japan are exacerbating the global liquidity squeeze, further strengthening the value of the dollar, and placing additional pressure on dollar-denominated crypto assets.
03 Old hands' survival guide: three practical strategies
As an experienced player, I would like to share three practical strategies to help novices survive and even profit in such a market.
First, do not blindly try to catch the bottom; wait for clear signals. In times of market panic, the most dangerous behavior is attempting to catch a falling knife. Based on my experience, a better strategy is to wait for the 3-day moving average to turn upwards, while volume significantly increases before taking action.
The current market fear and greed index has fallen to 16, entering the 'extreme fear' zone. While this indicates pessimistic market sentiment, it also means a rebound may be close. The key is to wait for a clear stop-loss signal, rather than predicting the bottom.
Secondly, focus on key indicators rather than market noise. In liquidity-driven markets, the following indicators are crucial:
10-year TIPS real yield: a breakthrough above 1.90% is a warning line for risks, and cryptocurrencies may come under pressure.
Fear and greed index: reduce selling below 25, consider reducing positions above 70.
Changes in stablecoin supply: this is a leading indicator of cryptocurrency liquidity.
Thirdly, strictly control positions; survival is better than profit. In an environment of increased volatility, I will keep single trade positions below 20% and set a stop-loss point at 8%. Historical data shows that when the market drops by 10%, this position management can keep the portfolio drawdown within 5%.
For novices, I recommend further reducing positions to 10-15% and avoiding high leverage. Data shows that in the past 24 hours, a very high proportion of long positions were liquidated, which is the result of excessive leverage.
One might ask, when will the market recover? Historically, once the TGA account target is met and bond issuance slows down, the pressure will ease. If the Fed really restarts balance sheet expansion in the future as some predictions suggest, even expanding by $300 billion to $500 billion annually, this new liquidity will provide strong support for risk assets.
A true bottom is not formed from a V-shaped reversal but is worn down over time. When most people in the market are panicking, investors who remain calm and follow their discipline will capture early gains in the new uptrend.
Surviving in the crypto market requires not a crystal ball to predict the future, but the wisdom to cope with the present. Only those who survive the storm are qualified to talk about the future.
