Introduction: Starting from Capital, Not 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 themes are often just triggers rather than true driving forces. They can attract attention, but they do not provide energy on their own. The real driving force comes from capital. When liquidity is abundant, even weak narratives can be amplified into market consensus. Conversely, when liquidity dries up, even the strongest narratives struggle to maintain their momentum.
The first part focuses on building the foundation: how to construct a global asset allocation and rotation framework that places cryptocurrencies in the appropriate macro context. The latter half of the framework will be elaborated in subsequent articles.
Step One: Step Outside the Cryptocurrency Realm and Map Global Assets
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 for understanding capital rotation across different cycles.
Instead, we can classify assets based on the roles they play at different stages of the economic and liquidity cycles. What matters is not whether an asset is labeled as "equity" or "commodity," but what it relies on and what factors it is susceptible to. Some assets benefit from falling real interest rates, some from inflation uncertainty, and others from outright risk aversion.
Building an "asset map" does not require in-depth knowledge of every market. What it truly requires is an intuitive understanding of the interdependencies of each asset: what conditions support it and what conditions weaken it. This mind map will serve as a reference system for all subsequent decisions.
Within this framework, cryptocurrencies should be treated with special consideration.
Why Cryptocurrencies Are Alternative Assets, Not 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 characteristics similar to risk assets.
However, correlation alone cannot define the essence of the economy.
From a capital structure perspective, stocks generate cash flow. Companies create earnings, distribute dividends, and can be valued using discounted cash flow models or valuation multiples. Even when 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 intrinsic cash flows that can be discounted. Therefore, traditional valuation frameworks are simply inapplicable.
Instead, cryptocurrencies behave like purely liquidity-sensitive assets. Their price movements are primarily driven by capital inflows and outflows rather than changes in fundamental productivity. Related discussions help explain this. Why does capital flow, but it does not determine everything? Regardless of capital flow.
Thus, cryptocurrencies are best understood as a non-cash-flow alternative asset positioned at the extreme end of the risk appetite spectrum. When liquidity is abundant and risk appetite is high, cryptocurrencies perform best; when capital prioritizes safety and yield, their performance tends to falter.
Liquidity Is the Core Driving Force Behind 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 typically stem from a structured process: forecasting future revenues, applying valuation multiples, and discounting the results to present value. This method is effective because the asset itself can generate measurable economic output.
Cryptocurrencies lack this anchoring effect. Their upside potential depends on whether new capital is willing to enter the market and accept higher prices. And this capital almost always comes from outside the cryptocurrency ecosystem—from stocks, credit, or cash that has been sidelined 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. Conversely, 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 Two: Focus on Macro Drivers Before Asset Details
The second pillar of this framework is macro analysis. Rather than starting with the study of specific assets, it is more efficient to first identify the variables that influence price movements. All assets are integrated 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 trends in Gross Domestic Product (GDP).
Systemic liquidity, often reflected in central bank balance sheets and money supply.
Risk appetite, typically measured by volatility indices and credit spreads.
Many cryptocurrency participants closely monitor Federal Reserve meetings but often only focus on interest rate decisions. However, institutional capital places greater importance on real interest rates (nominal rates adjusted for inflation) because real interest rates determine the true opportunity cost of holding non-yielding assets.
Inflation data is widely discussed in the cryptocurrency space, but liquidity and risk appetite are rarely given attention. 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 industrial chain provides deeper insights than isolating asset analysis.
Step Three: Build a Cycle-Based 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:
Monetary easing favors risk assets, including cryptocurrencies and small-cap stocks.
Monetary tightening favors defensive assets such as cash, government bonds, and gold.
This framework is not intended to be mechanically applied. Each asset's response will vary based on timing, expectations, and positioning. Nevertheless, a cycle-based reference can help avoid emotional decisions during market shifts.
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 rates at the end of the cycle to easing rates. Japan may be cautiously ending decades of ultra-loose monetary policy. China continues to undergo structural adjustments in a low-inflation environment, while parts of Europe are still grappling with economic stagnation.
Despite these divergences, the U.S. remains the anchor point for global capital flows. Dollar liquidity and U.S. interest rates continue to exert the strongest influence on global capital movements. 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 over 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 cycle awareness, investors can avoid many common analytical pitfalls.
The next article will build on this foundation, exploring the order of capital flows, real-world indicators, and how to identify when liquidity truly shifts toward high-risk assets.
The above viewpoints reference @Web3___Ace
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