Introduction: Start with capital rather than stories
This article marks the beginning of a new series of research on global asset allocation and rotation. After delving into this topic, we discovered a most unexpected yet crucial fact: it is not the emergence of new narratives that ultimately determines the cryptocurrency bull market.
Whether it is RWA, X402, or any other concept, these topics are usually just triggering factors rather than true driving forces. They can attract attention, but do not provide energy on their own. The real drive comes from capital. When liquidity is abundant, even weak arguments can be amplified into market consensus. However, when liquidity is depleted, even the strongest arguments struggle to maintain their momentum.
The first part emphasizes building the foundation: how to construct a global asset allocation and rotation framework that places cryptocurrencies in the appropriate macro context. The second half of the framework will be elaborated in subsequent articles.
Step 1: Step outside the cryptocurrency field and sketch a global asset map
The first step is to deliberately step outside the cryptocurrency market and construct a panoramic view of global assets. Traditional classifications—stocks, bonds, commodities—are useful, but insufficient to understand capital rotation across different cycles.
Conversely, we can classify assets based on the roles they play at different stages of the economic and liquidity cycles. What matters is not whether the asset is labeled 'equity' or 'commodity', but what it relies on and what factors it is vulnerable to. Some assets benefit from declining real interest rates, some from inflation uncertainty, and others from complete risk aversion.
Building an 'asset portfolio map' does not require in-depth knowledge of every market. What it truly needs is an intuitive understanding of the interdependencies of each asset: which conditions support it and which conditions weaken it. This mind map will serve as a reference system for all subsequent decisions.
Under this framework, cryptocurrencies should receive special treatment.
Why are cryptocurrencies considered alternative assets rather than traditional risk assets?
Cryptocurrencies are often grouped with stocks (especially U.S. tech stocks) because their price movements are highly correlated. On the surface, this classification seems reasonable. Cryptocurrencies exhibit extreme volatility, high beta coefficients, and significant drawdowns, all of which are characteristic of risk assets.
However, correlation alone cannot define the essence of the economy.
From the perspective of capital structure, stocks have cash flow. Companies generate profits, distribute dividends, and can be valued using discounted cash flow models or valuation multiples. Even if prices deviate from fundamentals, their anchoring logic is still based on cash flow.
The operational logic of crypto assets is fundamentally different from traditional assets. They do not generate dividends and lack inherent cash flows that can be discounted. Therefore, traditional valuation frameworks do not apply at all.
In contrast, cryptocurrencies behave like a purely liquidity-sensitive asset. Their price movements are primarily driven by capital inflows and outflows, rather than changes in fundamental productivity. Related discussions help to explain this. Why is capital flowing, but it does not determine everything? Regardless of capital flow.
Therefore, cryptocurrencies are best understood as a non-cash flow alternative asset that occupies an extreme position on the risk appetite spectrum. When liquidity is abundant and risk appetite is high, cryptocurrencies perform best; when capital prioritizes safety and yields, their performance tends to suffer.
Liquidity is the core driver of cryptocurrency performance
Once cryptocurrencies are viewed as liquidity assets rather than valuation assets, their behavior across different cycles becomes easier to explain.
In stock research, target prices usually stem from a structured process: forecasting future income, applying valuation multiples, and discounting the results to present value. This method is effective because the assets themselves can generate measurable economic output.
Cryptocurrencies do not possess this anchoring effect. Their upside potential depends on whether new capital is willing to enter the market and accept higher prices. This capital almost always comes from outside the cryptocurrency ecosystem— from stocks, credit, or cash that is idly sitting due to declining yields.
Therefore, understanding the sources and timing of liquidity is more important than tracking individual protocols or events. When capital begins to seek higher volatility and greater convexity, cryptocurrencies become one of the most attractive investment destinations. When capital prioritizes preservation of value, cryptocurrencies are often the first assets to be reduced.
In short, liquidity is the decisive factor; everything else is secondary.
Step 2: Focus on macro drivers before asset details
The second pillar of this framework is macro analysis. Instead of starting with specific asset studies, it is more efficient to first identify the variables that influence price movements, integrating all assets together.
At the highest level, five macro indicators play a core role:
Interest rates, particularly the distinction between nominal and real interest rates.
Inflation indicators, such as the Consumer Price Index (CPI) and Personal Consumption Expenditures (PCE).
Economic growth indicators, such as the Purchasing Managers' Index (PMI) and Gross Domestic Product (GDP) trends
Systematic liquidity, often reflected in central bank balance sheets and money supply
Risk appetite, usually measured by volatility indices and credit spreads.
Many cryptocurrency participants closely watch Federal Reserve meetings but often only focus on interest rate decisions. However, institutional capital places more importance on real interest rates (nominal rates adjusted for inflation), as real interest rates determine the true opportunity cost of holding non-yielding assets.
Inflation data is widely discussed in the cryptocurrency circle, but liquidity and risk appetite are rarely addressed. This is a blind spot. The dynamics of money supply and volatility mechanisms often explain overall market behavior before various narratives emerge.
A useful mental model is a simple transmission chain:
Inflationary pressures affect interest rates.
Interest rates affect liquidity conditions.
Liquidity conditions influence risk appetite.
Risk appetite drives asset prices.
Understanding the economy's position in this value chain provides deeper insights than analyzing assets in isolation.
Step 3: Build a cyclical thinking model
The economic cycle is a familiar concept, yet it remains crucial. From a macro perspective, economic cycles often alternate between expansion and contraction, easing and tightening.
In simple terms, this pattern typically looks like this:
Periods of monetary easing favor risk assets, including cryptocurrencies and small-cap stocks.
Periods of monetary tightening favor defensive assets such as cash, government bonds, and gold.
This framework is not intended to be mechanically applied. The reactions of each asset will differ due to variations in timing, expectations, and positioning. Nonetheless, a cyclical reference can prevent emotional decision-making during market transitions.
An important nuance is that global economic cycles are not synchronized. The world does not operate as a single economy.
As economic growth momentum slows, the U.S. may be transitioning from high interest rates at the end of the cycle to accommodative rates. Japan may be cautiously ending decades of ultra-loose monetary policy. China continues to make structural adjustments in a low-inflation environment, while parts of Europe are still grappling with economic stagnation.
Despite this divergence, the United States remains the anchor point for global capital flows. Dollar liquidity and U.S. interest rates still exert the strongest influence on global capital flows. Therefore, any global asset rotation framework should start with the U.S. and expand outward.
Conclusion: A framework is needed before prediction
The first half of this framework emphasizes structure rather than prediction. Its goal is not to forecast short-term price movements, but to understand the factors that make certain assets competitive at specific points in time.
By redefining cryptocurrencies as liquidity-driven alternative assets, focusing on macro drivers before narratives, and basing decisions on cyclical awareness, investors can avoid many common analytical pitfalls.
The next article will build on this to delve deeper into the order of capital flows, real-world indicators, and how to identify when liquidity truly shifts towards high-risk assets.
The above points are referenced from @Web3___Ace
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