The most frustrating characteristic of the recent market is this: whenever U.S. stocks pull back, cryptocurrencies often dive immediately, even experiencing deeper declines; yet when U.S. stocks stabilize and rebound or even reach new highs, cryptocurrencies appear indifferent and continue to decline subtly.
This phenomenon of weak correlation is quite challenging psychologically in trading, but in terms of the market's microstructure, it is actually a very clear signal. If one does not understand the underlying logic and blindly enters the market hoping for a 'catch-up rally', the current probability of success would be very low.
Based on my observations of recent capital flows and the macro environment, I believe this 'following the decline but not the rise' mainly stems from three levels of liquidity mismatch.
First, the 'liquidity transmission chain' of risk assets is broken.
We need to recognize a reality: in the hierarchy of global major asset classes, cryptocurrencies still occupy the most risky end.
The top layer consists of U.S. Treasuries and cash, the middle layer consists of core U.S. stock assets (especially AI concept stocks), and the bottom layer consists of crypto assets.
When macroeconomic conditions turn negative (for example, expectations of interest rate cuts are hindered), risk aversion rises, and funds will first withdraw from the most vulnerable positions. This is why it is essential to 'follow the decline'—because you are the highest risk, and when funds seek safety, you are the first to be sold off.
On the contrary, when liquidity is restored, funds come in 'drop by drop.' The water flow must first fill the large pool of the U.S. stock market; only when the U.S. stock market's valuation is too high for funds to continue chasing gains, or when liquidity overflows to the point of spilling, will it be the turn of the crypto market. Currently, the situation is that although the U.S. stock market is strong, liquidity has not reached the level of overflow, so we cannot access the funds.
Second, the 'blood extraction effect' of the U.S. stock market on the crypto market.
Currently, the U.S. stock market, especially the tech giants, has very strong earnings support. The AI narrative is the hardest logic globally right now; it is driven by solid performance.
In contrast, the current crypto market lacks new incremental narratives, and more is the existing capital engaging in mutual cuts. For large off-market funds (Smart Money), this is a simple choice: to buy Nvidia, which has performance support and is continually hitting new highs, or to buy Bitcoin, which has an unclear outlook and is currently consolidating?
Clearly, capital has chosen the former. The strength of the U.S. stock market has not only failed to stimulate the crypto circle but has instead absorbed speculative funds that might have flowed into the crypto market due to its higher certainty. This is a typical 'vampire effect.'
Third, the 'hollow' depth of the market.
This can be seen from the market data. During times of high uncertainty, the market makers' strategy becomes very conservative, leading to a deterioration in market depth.
The current market characteristics are: heavy selling pressure above, consisting entirely of profit-taking and trapped positions waiting to break even; while buying pressure below is very thin, as there is no incremental capital willing to catch falling knives at this position.
This leads to an awkward situation: when the U.S. stock market declines slightly, the crypto market is easily pierced due to weak support below; when the U.S. stock market rises, the crypto market faces significant selling pressure as the trapped positions above rush to exit, with even a slight pull from bulls leading to huge selling pressure.
Summary and Response
'Follow the decline, not the rise' is a typical characteristic of a stock game market, indicating that we are currently in a weak cycle.
For traders, the most dangerous operation at this stage is blindly going long due to subjective speculation of a 'catch-up rally.' Until this weak linkage is broken—such as seeing a clear peak in the dollar index or Bitcoin experiencing large purchases independent of the U.S. stock market—the best strategy is to maintain a defensive position.
Rather than frequently switching positions due to anxiety about missing out on the U.S. stock market, it is better to patiently wait for the signal of liquidity overflow to truly appear. But for long-term players, isn't this a good opportunity?
