The truth about cryptocurrency price fluctuations: capital flow outweighs all narratives

Opening: Stories Are Just a Cover, Capital Is the Key

Have you noticed that whenever the market rises, all kinds of new concepts flood in—RWA, x402, regenerative finance… These narratives can indeed spark discussions, but are they truly the core drivers of the crypto bull market?

The answer might surprise you: No.

These stories are just surface ripples. When liquidity is truly abundant, even the weakest arguments can be hyped into market consensus; conversely, even the strongest narratives fade into obscurity when liquidity dries up. What truly determines the fate of cryptocurrencies from start to finish is capital inflow and outflow—that is, liquidity is ultimately the ruler.

This realization is crucial because it changes how we observe the market. Instead of guessing what the next hot narrative will be, it’s better to first understand the logic of global capital flows.

Why Cryptocurrencies Should Not Be Treated as Ordinary Risk Assets

A common misconception is to lump cryptocurrencies with tech stocks—after all, their price movements are highly correlated, both are volatile, and their beta coefficients are not low. This classification seems reasonable on the surface, but it fundamentally overlooks the key differences.

Traditional stocks generate cash flows. Companies earn money and distribute dividends, so you can value them using discounted cash flow models. Even if prices deviate from fundamentals, cash flow remains an anchor. But cryptocurrencies do not produce any dividends, nor do they have intrinsic cash flows to discount; traditional valuation frameworks are useless here.

What does this imply? Cryptocurrencies are closer to pure liquidity-driven alternative assets rather than traditional risk assets. Their prices are entirely determined by capital inflows and outflows, with minimal influence from fundamentals.

Imagine a spectrum: one end is cash (absolutely safe), the other is cryptocurrencies (pure convexity pursuit). When investors’ risk appetite surges and they are willing to chase volatility with liquidity, cryptocurrencies become the most attractive target. When they start to protect their capital as if life depended on it, cryptocurrencies are often the first to be sold off.

The Global Asset Map: Where Do Cryptocurrencies Stand?

To understand the position of cryptocurrencies, we need to step out of the crypto circle and look at the overall flow of global capital.

Traditional classifications divide assets into stocks, bonds, and commodities—that’s correct, but it’s insufficient to explain why these assets rotate during certain periods. A more effective classification is based on the role each asset plays at different stages of the economic and liquidity cycle.

What conditions support a certain asset? What conditions weaken it?

Some assets benefit from falling interest rates (like long-term bonds); some benefit from rising inflation (like commodities); some benefit from a rebound in risk sentiment (like small caps and cryptocurrencies); others are most popular when everything is terrible (like gold and government bonds).

Building this “asset dependency map” doesn’t require you to be an expert in every market—just an intuitive understanding of what drives each asset. In this framework, cryptocurrencies should be categorized as liquidity-sensitive alternative assets—most active when liquidity is ample and risk appetite is high, most vulnerable when capital becomes conservative.

Macro Drivers: The Five Variables Truly Influencing Cryptocurrency Prices

Many crypto participants are nervously watching Federal Reserve meetings, but they usually only focus on the rate decisions themselves. What’s truly important is real interest rates—that is, interest rates adjusted for inflation.

Why? Because real interest rates determine the true opportunity cost of holding yieldless assets (like cryptocurrencies). When real rates are negative, holding coins becomes attractive; when real rates are high, holding cash is more profitable.

Besides interest rates, four core macro variables are at play:

Inflation Data—Consumer Price Index (CPI) and Personal Consumption Expenditures (PCE) are indeed watched, but many underestimate the impact of liquidity dynamics.

Economic Growth Signals—Purchasing Managers’ Index (PMI) and GDP trends tell you whether the economy is expanding or contracting.

Systemic Liquidity—Often overlooked, but decisive. Central bank balance sheet expansions and contractions, money supply changes—these can explain market behavior well before rate decisions.

Risk Appetite—Volatility Index (VIX) and credit spreads reflect whether the market is gambling wildly or hoarding cash.

There’s a clear transmission chain among these variables:

Inflation Pressure → Affects Interest Rate Policy → Changes Liquidity Conditions → Drives Risk Appetite → Determines Asset Prices

If you only look at assets themselves and ignore this chain, you risk falling into a liquidity trap—even if markets seem to be rising, liquidity may already be drying up, leaving only passive buyers to take the hit at the top.

Economic Cycles and Capital Flows

The importance of the economic cycle cannot be overstated. From a macro perspective, the economy swings between easing and tightening, and capital flows into different asset classes accordingly.

Easing cycles favor cryptocurrencies and small caps. Why? Because liquidity is abundant, and investors are willing to take risks. Funds flow from safe assets (cash, government bonds) into risk assets (stocks, cryptocurrencies).

Tightening cycles favor defensive assets. Cash becomes valuable, government bonds are attractive, gold is popular. During these times, cryptocurrencies are often the first to be sold off.

But a key detail: Global economic cycles are not synchronized. The US might be shifting from a high-interest-rate cycle to easing, Japan is ending decades of ultra-loose policies, China is restructuring under low inflation, and some European regions are still battling stagnation.

So, who has the final say? The US. The liquidity of the dollar and US interest rates have the strongest influence on global capital flows. Anyone trying to understand global asset rotation should start with the US macro environment and then look outward.

Framework Over Prediction

Finally, returning to the core: the purpose of this framework is not to enable precise short-term price predictions, but to help you understand why certain assets become more attractive at specific times.

By rethinking cryptocurrencies as liquidity-driven assets, prioritizing macro drivers over individual narratives, and developing a clear understanding of the economic cycle, you can avoid rash decisions when market sentiment shifts.

The sources and directions of liquidity are more important than any story. When you see the flow of capital clearly, you can see the true direction of cryptocurrencies.