By Michael Rinko, Delphi Digital Analyst

Compiled by: Felix, PANews

Why is it so hard for cryptocurrencies to rise? Ignoring the catalyst role of narratives, one reason is low liquidity.

BTC’s 1% book depth is at its lowest point of the year.

Trading volume performance on both CEX and DEX is terrible.

Stablecoins are in the midst of their worst drawdown ever.

The fundamental reason why capital continues to flow out of the crypto market rather than into it is interest rates. When you can make more profit by lending money to the US government, why lend it to Aave?

High interest rates have resulted in historically low on-chain activity.

The financing environment is equally brutal. Venture capital firms have shifted their attention from various altcoins to the ChatGPT front end.

The manifestation of poor liquidity is the fiercely competitive PvP market (projects are competing with each other). Everything is a zero-sum game. When a new token is launched, it is no longer seen as a "bullish innovation" as during the DeFi summer, but as "another mouth to feed" and take away some liquidity.

Thinking about the interaction between tokens, liquidity, and price in terms of supply and demand is an oversimplified but not entirely wrong way to think about it. This relationship can be described by the following formula:

Liquidity/Token = Forward Return

During the DeFi summer, tokens were unique. See: Foodcoins (PANews Note: During the DeFi summer, many projects named after food appeared, such as Sushiswap, YAM Finance, Pickle Finance, etc.).

But liquidity also dropped significantly, with ETH’s TVL jumping from a negligible amount to $7 billion in 3 months. For a while, the demand side of the equation (liquidity) won, pushing up the prices of almost all tokens, even Foodcoins.

The situation is different now. In today's market, various new tokens are forced to compete for the remaining liquidity, and various projects are rolling with each other. They need to grab market attention and liquidity among about 100,000 encrypted Degens.

You can imagine this scenario. During periods of increased liquidity (bull markets), popular narratives trade roughly in unison. But in bear cycles, various narratives compete for limited capital. The vicious capital rotation forms a hot ball of zero-sum profiteering, forming a very different price trend.

Even in the rare cases where narratives can coexist, competitive games are still the mainstream. You can see this in the Base ecosystem. You might think that Bald (Meme) and Friend Tech (SocialFi) will benefit each other because both will bring new users and capital to the Base ecosystem, but no, the relationship between the two eventually evolved into a parasitic relationship (one party benefits and the other party suffers).

In order to achieve the virtuous cycle of "data rising -> degens influx -> data rising", the liquidity environment needs to be improved. Although a small rebound in the future is indeed possible, the billion-level virtuous cycle depends on the retaliatory return of low-interest borrowing.

Valhalla is destined and coming, but it may only come after market turmoil. Before that, crypto people need to withstand the test of market volatility.