Economic Growing Pains and Liquidity Effects: Prelude to the True Prosperity of the Crypto Market

The title of this article might make you think: “Isn’t this viewpoint too crazy?” But after reading the full text, you’ll exclaim: “I must prepare for the big bull market!” That’s right, Bitcoin has soared from $16,000 to $110,000 in three years, but what we need to discuss is: has the real bull market already begun? Although this viewpoint sounds unreasonable, there is evidence to suggest that due to macroeconomic factors, the “real” bull market has not yet started.

Despite witnessing the largest institutional entry in Bitcoin’s history, the performance of altcoins throughout the entire cycle has been quite dismal, with several mini-bear markets occurring during this period.

I have recently studied some in-depth analyses of the causes of the crypto bull markets in 2013, 2017, and 2021. It’s not just the four-year cycle at play; there are deeper driving factors behind it, and these conditions have not appeared simultaneously again since then.

If you have studied what exactly ignited the bull market frenzy, you will find that it is not narrative logic or optimistic expectations, but rather the macro Liquidity mechanism. Upon careful analysis, you will discover that the current market is merely at the prologue stage.

The Eleven Rings of Liquidity Magic

In the financial sector, there are eleven key liquidity drivers that influence the market like the eleven rings of magic.

The twelfth ring is about to ignite all the other rings, which I will elaborate on later; it has just emitted a brief glow.

If you want to understand:

• Why past economic cycles collapse suddenly
• How macroeconomic tools truly inject fuel into the market
• The key trigger that ultimately ignites the fuse

So please continue reading this analysis.

Why hasn’t the real crypto bull market started yet?

Before the frenzy erupts, we need to grasp the full macro framework.

The Wonderful Effects of the Liquidity Magic Circle: The Capital Inflow Mechanism in the Crypto Market

All bull markets have a common point: they coincide with large-scale liquidity injections globally. This surge in liquidity is not accidental, but rather stems from the role of macroeconomic regulation driven by central banks and fiscal authorities:

1. Interest rate cut: Borrowing costs decrease, stimulating debt-driven economic growth.

2. Quantitative Easing: The central bank purchases government bonds and injects cash into the liquidity system.

3. Forward guidance (commitment to not raise interest rates): guiding expectations by indicating future low interest rates.

4. Lowering the reserve requirement ratio: The funds that banks need to keep are reduced, allowing for an increase in available lending funds.

5. Relax capital requirements: Reduce institutional constraints on risk-taking.

6. Loan grace policy: Maintain credit liquidity during defaults or economic downturns.

7. Bank relief or bottoming measures: Prevent systemic collapse and restore market confidence.

8. Large-scale fiscal expenditure: Government funds are directly injected into the real economy.

9. Release of funds from the U.S. Treasury General Account (TGA) - releasing cash from the Treasury account into circulation to increase the cash supply.

10. Foreign Quantitative Easing Policies and Global Liquidity: Central banks’ overseas operations affect the crypto market through capital flows.

11. Emergency Credit Facility: A temporary loan program established during times of crisis.

These actions not only boosted the prices of traditional assets but also sparked a speculative frenzy. As the asset with the highest risk and the greatest potential for appreciation in the financial system, cryptocurrency has always been the biggest beneficiary.

Each liquidity tool can operate at different intensities. When multiple rings rotate simultaneously, their effect will create a multiplier effect, igniting a frenzy that drives a bullish surge across the entire crypto market.

Core Driving Force: Economic Pains

The only instruction driving the liquidity tool of the Eleven Ring is: economic pain.

Historical case studies:

2008 to 2009: Financial Crisis → Comprehensive Quantitative Easing, Zero Interest Rates, Emergency Assistance

2020: COVID Crash → Unprecedented global Liquidity, stimulus cash checks distribution, record M2 money growth

Currently: Recently we have witnessed a bear market crash in the stock market in record time, but is this really enough? The market’s firepower has not yet been fully unleashed, and the attitude of those in power remains stubborn, especially against the backdrop of a strong recovery in the market.

More indications: The Richmond Fed’s recent Manufacturing Employment Survey came in at -18, worse than in 2020 (-12) and 2008 (-14), indicating mass unemployment in the industrial sector. That’s exactly what the Fed is watching closely.

Liquidity tools have not been fully activated

Although the crypto market has seen an increase recently, the real bull market has not yet started. Most liquidity leverage is still dormant or restricted. While we are moving in the right direction, there is still some distance to the final stage.

If there is no new large-scale Liquidity injection, the conditions that fueled the frenzy in the past no longer exist.

This is the reason for the recent orderly rise in the market, driven by adoption and led by institutions, rather than a frenzy of retail investors causing a tumultuous bull market.

There is fundamentally no sufficient idle capital in the financial system to create bubble-like frenzy.

Historic Bull Markets and Corresponding Liquidity Conditions

2013

• The interest rate remains at 0% • Full implementation of quantitative easing • Government expenditures are at a high level

Result: Bitcoin rose from less than $15 to over $1000

2017

• The pace of interest rate hikes in the United States is slow, and rates remain low. • Japan and Europe continue to implement quantitative easing policies • The market liquidity from 2016 continues into this year.

Result: Bitcoin surged from about $1000 to about $20000, while other cryptocurrencies prices skyrocketed in sync.

2021

• All liquidity control measures are fully operational. • M2 money supply increased by over 25% year-on-year.

Result: Bitcoin rises to about 69000 dollars; other asset prices surge simultaneously

In every case, the liquidity surge precedes the bull market rise.

Key Signals: M2 and PMI

There are two indicators that have consistently aligned with the bull market for a long time that are worth closely monitoring:

M2 Money Supply (YoY Growth Rate)

Track the growth rate of broad money. Historically, every major rally has been preceded by rapid currency growth. Today, M2 growth is broadly flat. Although some of the periodical highs have begun to be made (but they are completely incomparable to historical gains), this is a clear signal that the market has not yet gained upward momentum.

ISM Manufacturing PMI

Reliable business cycle indicators. An index above 50 indicates economic expansion; historical data shows that when the Purchasing Managers’ Index (PMI) approaches or breaks through 60, cryptocurrencies tend to experience a bullish trend. However, in this cycle, the PMI index has just slightly exceeded 50 and then retreated again.

! [Economic Pain and the Magic Ring of Liquidity: Why the Real Crypto Bull Market Has Not Started Yet?] ](https://img.gateio.im/social/moments-a331b7d90b6e481c1e403b27e3837fdd)

Data shows that the macro environment has not yet shifted, so we have not seen a real frenzy.

Conclusion: The bull market is still brewing

Every crypto bull market has started when: a large amount of liquidity is released when the macro economy is in trouble.

Currently, economic pains are accumulating, but solutions have yet to emerge. The eleven-ring liquidity tools remain closed. Only when economic difficulties force policymakers to take action will the environment required for speculative frenzies truly take shape.

Unless a large amount of funds flows in, the crypto market will remain fundamentally constrained, although it may continue to rise slowly.

The real bull market will begin when the liquidity tools are fully activated, not before.

I believe that investors should be well prepared during this period and establish reasonable investment strategies, because once macro policies shift, the market may present a growth pattern that is completely different from the current one. At the same time, vigilance should be maintained, as economic pains may come more severely than expected, and the impact on the short-term market cannot be ignored.