Global Asset Rotation: Why Liquidity Drives Cryptocurrency Cycles

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 drives the crypto bull market.

Whether it’s RWA, X402, or any other concept, these themes are usually just triggers rather than true drivers. They can attract attention, but they do not generate energy themselves. The real power comes from capital. When liquidity is abundant, even weak arguments can be amplified into market consensus. Conversely, when liquidity dries up, even the strongest arguments struggle to maintain 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 Out of the Crypto Realm and Map Global Assets

The first step is to deliberately step outside the crypto market and create a panoramic view of global assets. Traditional classifications—stocks, bonds, commodities—are useful but insufficient to understand capital rotation across different cycles.

Instead, we can categorize assets based on their roles at various stages of economic and liquidity cycles. The key is not whether an asset is labeled “equity” or “commodity,” but what it depends on and what factors influence it. Some assets benefit from declining real interest rates, others from inflation uncertainty, and some from thorough risk aversion.

Building an “Asset Map” does not require in-depth knowledge of every market. What it truly needs is an intuitive understanding of the interdependence among assets: what conditions support them, and what conditions weaken them. This mind map will serve as a reference system for all subsequent decisions.

Within this framework, cryptocurrencies should be treated with special consideration.

Why do cryptocurrencies belong to alternative assets rather than traditional risk assets?

Cryptocurrencies are often grouped with stocks (especially US tech stocks) because their price movements are highly correlated. On the surface, this classification seems reasonable. Cryptos exhibit extreme volatility, high beta, and large drawdowns—all characteristics similar to risk assets.

However, correlation alone does not define the essence of the economy.

From a capital structure perspective, stocks have cash flows. Companies generate earnings, distribute dividends, and can be valued using discounted cash flow models or valuation multiples. Even if prices deviate from fundamentals, their anchoring logic remains based on cash flows.

Crypto assets operate under a completely different logic. They do not produce dividends nor have intrinsic cash flows that can be discounted. Therefore, traditional valuation frameworks are fundamentally inapplicable.

Instead, cryptocurrencies behave like pure liquidity-sensitive assets. Their prices are mainly driven by capital inflows and outflows, rather than changes in fundamental productivity. Explaining this is aided by relevant discussions: capital flows, but they do not determine everything. Regardless of capital movement.

Thus, cryptocurrencies are best understood as non-cash-flow alternative assets, positioned at the extreme end of risk appetite spectrum. When liquidity is plentiful and risk appetite is high, cryptocurrencies perform best; when capital prioritizes safety and yields, their performance suffers.

Liquidity is the core driver of crypto performance

Once viewed as liquidity assets rather than valuation assets, their behavior across cycles becomes easier to explain.

In stock research, target prices often stem from a structured process: forecasting future earnings, applying valuation multiples, and discounting to present value. This method works because the assets themselves generate measurable economic output.

Crypto assets lack this anchoring effect. Their upside depends on whether new funds are willing to enter the market and accept higher prices. These funds almost always come from outside the crypto ecosystem—originating from stocks, credit markets, or idle cash due to declining yields.

Therefore, understanding the source and timing of liquidity is more important than tracking individual protocols or events. When capital begins seeking higher volatility and convexity, cryptocurrencies become one of the most attractive investment destinations. When capital prioritizes preservation, they are often the first to be sold.

In short, liquidity is the decisive factor; everything else is secondary.

Step Two: Focus on Macro Drivers First, Then on Asset Details

The second pillar of this framework is macro analysis. Instead of starting with specific asset research, it’s more efficient to identify the variables influencing prices—integrating all assets together.

At the highest level, five macro indicators play a central role:

Interest rates, especially the distinction between nominal and real interest rates.

Inflation indicators, such as Consumer Price Index (CPI) and Personal Consumption Expenditures (PCE).

Economic growth indicators, like Purchasing Managers’ Index (PMI) and Gross Domestic Product (GDP) trends.

Systemic liquidity, often reflected in central banks’ balance sheets and money supply.

Risk appetite, typically measured by volatility indices and credit spreads.

Many crypto participants closely watch Federal Reserve meetings but often focus only on rate decisions. However, institutional capital pays more attention to real interest rates (nominal rates adjusted for inflation), because real rates determine the true opportunity cost of holding yieldless assets.

Inflation data is widely discussed in crypto circles, but liquidity and risk appetite are rarely given enough attention. This is a blind spot. Money supply dynamics and volatility mechanisms often explain overall market behavior before other narratives emerge.

A useful mental model is a simple transmission chain:

Inflation pressures influence interest rates.

Interest rates affect liquidity conditions.

Liquidity conditions influence risk appetite.

Risk appetite drives asset prices.

Understanding where the economy sits within this chain provides deeper insights than analyzing assets in isolation.

Step Three: Build a Cyclical Thinking Model

The economic cycle is a familiar concept but remains crucial. From a macro perspective, cycles tend to alternate between expansion and contraction, easing and tightening.

In simple terms, this pattern often looks like:

Loose monetary periods favor risk assets, including cryptocurrencies and small caps.

Tight monetary periods favor cash, government bonds, and gold—defensive assets.

This framework is not meant to be mechanically applied. Each asset’s response varies depending on timing, expectations, and positioning. Nonetheless, cycle-based references help avoid emotional decisions during market regime shifts.

A subtle but important point is that the global economic cycle is not perfectly synchronized. The world does not operate as a single economy.

As growth momentum slows, the US may be shifting from late-cycle high interest rates to easing. Japan might be cautiously ending decades of ultra-loose monetary policy. China continues structural adjustments in a low-inflation environment, while parts of Europe still grapple with stagnation.

Despite these differences, the US remains the anchor of global capital flows. Dollar liquidity and US interest rates continue to exert the strongest influence on global capital movements. Therefore, any global asset rotation framework should start with the US and then expand outward.

Conclusion: A Framework 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 times.

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.

Macro analysis sounds convincing but often yields limited practical results. Trends in interest rates, inflation, and liquidity seem far removed from daily portfolio choices. This gap between theory and practice is why most macro frameworks fail.

The second half of this series aims to address this gap. The key is not abandoning macro thinking but refining it through asset decomposition—understanding which assets are globally priced and which are locally priced. This distinction determines actual capital flows and explains why some markets outperform while others stagnate.

Attribute Decomposition: Why Pricing Mechanisms Matter

After mapping the global asset distribution, the next step is to decompose assets based on their pricing mechanisms. This step is critical because capital is finite. When funds flow into one market, they must flow out of another.

On the surface, cryptocurrencies seem borderless. They trade 24/7, unaffected by national exchanges or regions. However, the capital inflows into crypto are not entirely borderless. They originate from specific markets: US equities, Japanese bonds, European savings, or emerging market capital.

This presents an important analytical challenge. While crypto prices are global, their funding sources are local. Recognizing this is vital. Where the money comes from is just as important as understanding why it moves.

The same applies to traditional assets. Stock analysis must distinguish US stocks, Japanese stocks, and European stocks. Each reflects different economic structures, policy regimes, and capital behaviors. Only with clear differentiation can macro variables be effective.

Why Macroeconomics Often Feels “Useless” in Practice

One reason macro analysis is often overlooked is the perception that it is disconnected from practical trading. When deciding whether to buy a particular asset, inflation data and central bank speeches seem abstract.

However, this is not because macroeconomics is irrelevant, but because its application is often too broad.

Excess returns do not come from predicting economic growth or inflation in isolation but from understanding how macroeconomic environment changes influence yields. Reallocating marginal capital among competing assets, market trends depend not on absolute conditions but on relative attractiveness.

When capital is scarce, it concentrates; when liquidity expands, it searches everywhere. Ignoring this process means passively waiting for market narratives rather than proactively leading market trends.

Studying macro trends allows investors to track the most favorable assets over different periods, rather than being stuck in inactive markets waiting for conditions to improve.

Global Priced Assets: One Dollar, One Market

Some assets are globally priced. The implicit assumption behind this classification is the US dollar as the world’s anchor currency.

Cryptocurrencies, gold, and major commodities fall into this category. Their prices reflect global supply and demand, not the conditions of any single economy. Whether dollars flow in from New York or Tokyo, the impact on global prices is the same.

This has important implications: the indicators used to analyze these assets tend to overlap significantly. Real interest rates, dollar liquidity, global risk appetite, and monetary policy expectations often influence all three simultaneously.

Because of this overlap, globally priced assets are often the most effective targets for macro-driven asset allocation. Correctly assessing liquidity conditions can generate returns across multiple markets at once.

This is the first layer of asset rotation efficiency: understanding when globally priced assets will benefit together from the same macro tailwinds.

Stocks as Locally Priced Assets

Stocks are fundamentally different. They represent claims on the future cash flows of specific economic entities. Therefore, even in a global capital market era, stock prices retain regional characteristics.

Global liquidity is important but also influenced by local factors. Each stock market is affected by its unique structural factors.

The US stock market is influenced by global capital inflows, technological leadership, and multinational dominance. Its valuation often reflects not only domestic economic growth but also the ability of US companies to generate profits worldwide.

Japanese stocks respond strongly to exchange rate movements, corporate governance reforms, and the long-term recovery from deflation. Even moderate inflation or wage growth can significantly impact sentiment and valuation.

European stocks are more sensitive to energy costs, fiscal constraints, and regional political coordination. Economic growth tends to be slow, making policy stability and cost structures more influential.

Due to these differences, equity investing requires deeper local knowledge compared to global priced assets. Macro trends lay the foundation, but local structures determine the final outcome.

Bonds as Jurisdictionally Priced Assets

The bond market is more regionally oriented. Each sovereign bond market reflects a specific currency, fiscal capacity, and central bank credibility. Unlike stocks, bonds are directly linked to a country’s balance sheet.

Government bonds are not just yield instruments; they are also a trust indicator—trust in monetary policy, fiscal discipline, and institutional stability.

This makes bond analysis particularly complex. Two countries may have similar inflation rates, but differences in monetary regimes, debt structures, or political risks can lead to vastly different bond market dynamics.

In this sense, bonds are assets priced by jurisdiction. Their performance cannot be generalized across markets. Studying bonds requires understanding each country’s balance sheet, policy credibility, and long-term demographic pressures.

Synthesis: Building a Practical Global Framework

By combining the previous steps with attribute decomposition, a functional global asset framework begins to take shape.

First, construct a panoramic asset map, not just focusing on a single market.

Second, identify macro drivers that can simultaneously influence all assets.

Third, understand each asset’s position within the cycle.

Fourth, distinguish between global pricing mechanisms and local pricing mechanisms.

This layered approach transforms macro analysis from abstract theory into a decision-making tool.

Why Cryptocurrencies Remain the Best Observation Point

While this framework applies to all assets, cryptocurrencies remain a particularly insightful entry point. Due to the lack of cash flows and valuation anchors, cryptos react faster and more transparently to liquidity changes.

Recent market performance clearly illustrates this. Despite multiple rate cuts in the US, crypto prices often consolidate or decline. This confuses many investors who expected easing to automatically push prices higher.

A missing link is risk appetite. Rate cuts do not guarantee immediate liquidity expansion nor ensure capital will flow into high-volatility assets. There is a key difference between existing funds and willing risk-taking capital.

The driving force behind crypto bull markets is not “excess” capital but capital that is no longer afraid of declines. Only when capital shifts from preservation to speculation does liquidity alone become insufficient.

This also explains why predictions of “cryptocurrency future rallies” are often vague. The question is not whether easing will continue but when risk tolerance will truly change.

The True Role of Cryptocurrency in Global Portfolios

In traditional financial narratives, cryptocurrencies are often described as “digital gold.” But in reality, institutional capital treats it quite differently.

In actual asset allocation decisions, crypto’s priority is low. It is neither a core hedge nor a defensive asset. It is a liquidity expression at the end of a cycle—more attractive than idle funds but far less trustworthy than almost all other assets.

Understanding this reality is not pessimistic but clarifying. It explains why cryptos underperform during cautious easing cycles but can explode when confidence recovers.

Conclusion: It’s Just a Framework, Not a Promise

The second part refines the structural foundation of the global asset allocation framework. It does not offer shortcuts or guarantees but provides a perspective to understand the true cycle of capital.

By distinguishing between global and local pricing, and recognizing that cryptocurrencies depend on risk appetite rather than stories, investors can better identify where opportunities emerge.

The most interesting insights will come in subsequent stages—when this framework is applied to real-time data and capital flow signals. These meanings will unfold gradually because value itself resides in the process.

A framework is just the beginning; the real work starts with observation.