It is said that this cycle is a bull market for BTC and its ecosystem, but during this period, the crypto industry seems to have entered a "difficult time", with the total market value of cryptocurrencies falling from 2.721T to 2.041T, a drop of 24.7%.

This is even more evident in specific assets:

On the first-tier asset side, Bitcoin fell from $73,777 to $56,552, the leading inscription asset $ORDI fell by nearly 70%, and the leading ARC2O asset $ATOM has been lying dormant and has not recovered. The runes that were highly anticipated by the world only lasted for 2-3 days, like a flash in the pan.

On the second-layer ecosystem side, $Merlin, the leader of the BTC ecosystem, had a TVL of more than $3.5 billion, but has now fallen back to around $1.39 billion. Its protocol token MERL has fallen from a high of around 2U to 0.44U, a drop of nearly 80%. $CKB, a once-promising "isomorphic binding" BTC L2 token asset, has also fallen by nearly 70%.

The more excited people are when asset prices rise, the more depressed they will be when asset prices fall! But what causes the current situation? I think it is the "liquidity dilemma".

When it comes to liquidity, it actually includes two aspects: one is liquidity supply (supply side), and the other is liquidity conversion (demand side). These two aspects boil down to people's demand for liquidity. These two aspects need to match each other and complement each other.

Liquidity supply, that is, an increase in money supply, can be local or industry-wide, which will lead to an increase in local crypto asset prices or the market value of the entire industry. Partially, for example, the BTC ETF passed, a large amount of external funds bought BTC, and the price of BTC immediately increased to exceed $73,000. However, this was partial, and other crypto assets did not grow significantly during the same period, such as ETH.

For example, the Federal Reserve releases money across the industry, and some of the funds are converted into stablecoins such as USDT and enter the entire industry, bringing incremental growth, leading to a general rise in cryptocurrencies. When there is no external capital injection, we will also see that some crypto assets are constantly being pulled up, attracting funds in the circle to flow from one ecosystem to another, from one asset to another hot asset. This is like the tide, the water rises when the tide comes, and the water recedes when the tide goes. It manifests as a violent "involution".

When external funds enter the circle, liquidity is increased, and these liquidity will inevitably be used to "buy" and "sell" various crypto assets, and large-scale transactions will occur. Trading is the entry point for liquidity supply to move towards liquidity conversion.

The so-called transaction (exchange) is essentially liquidity conversion, which is the ability, efficiency and security of converting one asset into another (cryptocurrency, stablecoin, fiat currency).

Capability is a question of whether it is feasible, such as can NFT be transformed into FT? Can assets go from L1 to L2?

Efficiency is a question of whether it is good or not, whether it is fast or not, such as whether the loss without compensation is large? Will it be attacked by sandwiches? How long will it take for cross-chain assets to be confirmed?

Security is a basic requirement. Is there a centralization risk? Will there be a RUG? ......

Solving the above problems involves the construction of ecological infrastructure, which needs to meet the liquidity conversion and even income issues involved in asset transactions, payments, lending, mortgages, derivatives, etc. We see that in the field of encryption, most of the infrastructure (DApp) is directly or indirectly built around liquidity conversion to achieve profits or income from assets.

The most basic facilities are CEX and DEX. The current structure of CEX is basically set, such as Binance, Coinbase, OKx, etc. However, for DEX, because it involves the second-layer expansion of BTC, it has just begun, but the competition is also becoming fierce.

Let’s go back to the original question of this article - liquidity dilemma. This is manifested in:

First, from the supply side, insufficient external liquidity makes the price of crypto assets unsupported;

Second, on the demand side, the ecological infrastructure is incomplete, and it is difficult to achieve large-scale and smooth liquidity conversion, which cannot attract an increase in liquidity supply.

The third is the issue of asset returns. If a large amount of idle BTC really becomes digital gold, it will not generate any returns. This also makes it impossible for BTC purchased through BTC ETF to enter the second-layer ecosystem. However, solutions such as Babylon are promoting BTC to become an interest-bearing asset.

But I think the current liquidity dilemma is just a process and stage of this bull market. Because we see two relatively certain positive aspects:

The first is the liquidity supply side: the Federal Reserve may cut interest rates and release more money this year, which will bring incremental funds to the crypto industry; at the same time, with the advancement of BTC ETF, more and more listed companies will put BTC into the asset side of their balance sheets, which will undoubtedly benefit BTC and the entire industry.

Second, on the demand side: Although BTC L2 is not complete and asset prices are not impressive, the construction is in full swing. We have seen that some L2 ecosystems are continuing to make efforts and have the foundation for large-scale development. For example: Merlin, CKB, Babylon, B2, BEVM, etc. These infrastructures are releasing the potential for asset liquidity conversion and revenue creation to match the upcoming large-scale liquidity supply. They are laying the foundation for the "liquidity explosion" and making full preparations.

We expect that when liquidity supply arrives on a large scale, the BTC ecosystem will be ready, and we will welcome the bull market outbreak together.