Faded glory and dreams, liquidity, market sentiment and cycles

Author: Leo lau Source: X, @leo7_lau

1. Faded dreams, liquidity, emotions and cycles

1. Faded glory and dreams

A few years later, many people have begun to emerge in the blockchain industry, not only OGs such as Adam, but also a group of technology geeks and firm believers.

At that time, all tracks were flourishing. CZ was still a little immature. Vitalik was called V God, but now he has been downgraded to V Brother. Li Lin and Xu Mingxing could drink shirtless. At that time, people's eyes were bright, and the shouts of overthrowing Nasdaq resounded through the sky.

A, soon the ICO in 2017 ushered in a violent bull! During the epidemic, the United States led the global flooding. At the end of 2020, big DEFI and NFT brought huge liquidity to the circle, and many innovations emerged. At the same time, 2021 was also the happiest time for VC! VC achieved a good exit that year and obtained huge returns. At the same time, it also spawned many projects. However, it also laid the groundwork for the subsequent downturn, because the VC of the project at that time needed to realize in the next round of cycles. It will consume more liquidity. Of course, people from all circles are moving at the news, forming this very special aggregate.

B. The institutional drive of this round of market is slightly different from the previous two rounds. Under the heavy punch of policy supervision, accompanied by the interest rate hike of the Federal Reserve, from the collapse of Luna, FTX, and Three Arrows Capital in 2022, institutions have dominated the bear market of the industry, and the passage of BTCETF is also driven by institutions, and it also drives the activity of brc20, runes, and various memes on the chain. ETF has absorbed a lot of funds into the BTC ecosystem. It seems to be very good news, but it suppresses the innovation of other public chains and projects. Even Ethereum's L2 is rarely used, as crazy as before.

C, in 2024, the Fed's 50bp interest rate cut in September, and the People's Bank of China's big move, a 50BP cut in the reserve requirement ratio, and mortgage interest rates have released huge liquidity, so that hedge fund tycoon David Tepper is frantically long, and the A-share market has risen sharply, but we still need to observe whether funds will continue to flow into the financial market. The current increase brought by liquidity still needs the support of project fundamentals!

From contacting many people in the circle and many OGs, we have observed that everyone strongly feels the depletion of liquidity, the project innovation is not enough, investors, project parties, and retail investors are working very hard, and the previous narrative seems to be useless. Attracting new users, growth, and billions of TVL at every turn, the seemingly active TG and Dscord groups, in fact, did not leverage the second round of takeoff. Behind the lack of liquidity, many projects are also struggling on the brink of life and death. We have seen that AI has developed rapidly in recent years, but where is the real killer application of web3? Does the project have real value? Are there any applications and profit closed loops that can be truly realized?

2. User portrait of the currency circle

As of 2024, a comprehensive description of the cryptocurrency user portrait may include the following aspects, but please note that this is a dynamic field and user characteristics may change with time and technological development:

A. Age distribution:Although cryptocurrency was originally considered a game for young people, people of all ages are now involved. However, the younger generation (especially millennials and Generation Z) is still the main user group because they are more familiar with the Internet and digital technology.

B, Educational Background:In general, cryptocurrency users have a high level of education. They often have a college degree or higher, because understanding cryptocurrency, blockchain technology, and related investment strategies requires certain technical and economic knowledge.

C, Occupation:Tech industry practitioners, financial analysts, investors, and entrepreneurs are active participants in the cryptocurrency field. In addition, freelancers and digital natives (such as content creators, bloggers, etc.) also tend to use cryptocurrency because of their pursuit of freedom and decentralization.

D. Economic Status:Users range from high-income earners to the middle class seeking wealth appreciation. Cryptocurrency is seen as an investment tool, and participants hope to obtain high returns by investing in mainstream currencies such as Bitcoin and Ethereum, or participating in early ICOs (initial coin offerings).

E. Geographical Distribution:The global nature of cryptocurrency makes users spread all over the world. However, some regions or countries have a higher degree of acceptance of cryptocurrencies due to policies, economic conditions or culture, such as Nordic countries, some Asian countries (especially South Korea and Japan), the United States, Canada, etc.

And many users regard cryptocurrencies as investment tools, hoping to profit from price fluctuations. A small number of users use cryptocurrencies as a means of payment, especially in some industries (such as games, technology product sales, etc.) or countries (such as ELSalvador, etc.), some users are attracted by the anonymity and decentralization of cryptocurrencies, and hope to avoid the supervision of the traditional financial system. Some users support the concept of decentralization and free economy, and believe that cryptocurrency is the prototype of the future financial system.

The Web3 industry is special and interesting enough. It is said to be a financial industry? There are indeed many stories that Wall Street loves to hear, and there are many investors behind it, but there are few real product value outputs or autonomous business closed-loop models. You say it is an Internet industry? It is true that the product architecture is extremely similar to the traditional Internet, but most products do not have a profitable closed loop, and most products may rely on currency issuance and VC transfusions. You say it is purely a marketing industry? No, although there are traces of Ponzi CX now, and it even attracts people in the circle, it also needs a lot of marketing and promotion. In order to catch the hot spots, traffic is also used to the extreme! However, it is not 100% to find a buyer. Many ecosystems have their own endogenous driving force.

In short, this industry is actually a mixture of Internet + finance + marketing, so everyone sees a lot of phenomena, some are high-end, pragmatic, and idealistic, and there are also some chaos, and they can all find their own position!

2. Liquidity and market sentiment and cycle

In the complex pattern of global finance, capital flows like a river, and liquidity and market sentiment become the silent architects of market cycles. Let's explore how these often misunderstood and underestimated forces affect the trajectory of the economy, with a special focus on the recent shift in China's economic policies and their chain reactions to the financial sector, including the cryptocurrency market.

1. The rise of liquidity in the East

Liquidity is the lifeblood of financial markets, and a major shift from the East has recently taken place. The unexpected meeting of the Politburo in September 2024 marked a key moment, indicating that China has taken a positive stance on economic revitalization. This is not just another policy adjustment, but a coordinated intervention presided over by Xi Jinping himself, aimed at injecting vitality into the Chinese economy through:

Monetary policy adjustments: A sharp reduction in the reserve requirement ratio by 50 basis points, combined with other monetary easing measures, injected more than 1 trillion yuan into the financial system, highlighting the central bank's commitment to liquidity.

Fiscal policy focus: Emphasis on countercyclical fiscal policy to support necessary spending, hinting at upcoming fiscal measures.

Capital Market Support:Direct intervention measures such as stock purchases were taken to stabilize the market, demonstrating an intention to enhance investor confidence.

The increase in liquidity comes at a time when the Chinese market is severely undervalued compared to the US market, laying the foundation for a potential recovery and reallocation of capital.

2. Market Sentiment and China Trade

Despite strong growth in some domestic industries, China has long been evaluated with suspicion and labeled as "not worth investing". However, the Politburo's actions have greatly changed this evaluation. Market sentiment is usually driven by fear or greed, and these policy changes provide it with a new catalyst, leading to:

Global Repositioning: Western markets interpreted these moves as a green light for policy easing, triggering a surge in investment interest in China.

Reverse returns: As the market adjusts direction, investors who go against the prevailing negative sentiment begin to reap rewards.

3. Impact on the crypto market

Cryptocurrencies are often viewed as independent entities, but are increasingly connected to traditional financial markets. The current cycle shows:

The shift in capital flows: Unlike previous cycles dominated by retail enthusiasm, this cycle has seen greater institutional participation and stronger appeal for traditional finance. The CME futures price exceeding the Binance futures price, as well as the upcoming spot products, reflect this shift.

4. Macro liquidity effect:

Global liquidity is rising as the United States and China enter an easing cycle. Coupled with geopolitical events such as the US election, it may spread to risky assets such as cryptocurrencies.

Investor Behavior: The wealth effect brought by technology/AI stocks and the appeal of zero-day options have weakened the appeal of cryptocurrencies in the retail sector to some extent. However, as liquidity eases, cryptocurrencies may regain interest, especially when key figures recognize cryptocurrencies as portfolio assets.

Third, Looking Ahead

The future depends on several key factors:

Chinese savers: With a savings rate of 34%, how and where these capitals are reallocated will have a significant impact on global markets. Further observation is needed.

Economic goals: Whether China achieves its 5% GDP growth target will affect investor confidence and capital rotation.

Global policy coordination: Coordinated easing policies among major economies may trigger a broader risk appetite, which may benefit high-risk assets such as cryptocurrencies.

We need to observe whether changes in consumer sentiment on the upcoming Double 11 in mainland China can support a fundamental shift in market sentiment, continued capital inflows into financial markets, and changes and continuity in presidential policies in the United States after November 5!

Fourth Summary

Liquidity and market sentiment are not just economic phenomena, but the pulse of market cycles. Judging from recent events in China and their impact on global finance, understanding these dynamics is critical to navigating an increasingly interconnected financial world. Whether in traditional markets or in the booming cryptocurrency sector, the flow of liquidity and changes in sentiment will continue to determine the rhythm of economic cycles.

No matter how we still have ideals and dreams for the industry, we still respect Satoshi Nakamoto's reform of reshaping production relations, even if it is like a quagmire now, everyone is confused and doubtful, even if the world's macro-pattern and political divisions are becoming increasingly severe, even if the future looks unclear, and the original intention and dream seem to fade, but all this is only temporary, he is like a star, a spark can start a prairie fire.