You've probably heard that "money flows into crypto" during bull markets. But have you ever wondered how that actually works? Where does the money come from? How does it get there? And why does it take time?
The answer is the liquidity ladder—a step-by-step path that money follows from central banks to your crypto wallet. Understanding this ladder doesn't just satisfy curiosity. It helps you see market movements before they happen.
Rung 1: Central Bank Policy
It all starts with central banks. When the Federal Reserve, European Central Bank, or Bank of Japan decides to inject liquidity (through rate cuts, quantitative easing, or other tools), they're creating new money in the system.
This money doesn't go directly to crypto. It goes to commercial banks first, as reserves. Banks then use these reserves to make loans, buy assets, or invest.
The key signal to watch: central bank announcements, rate decisions, and policy statements. These are the first dominoes in the chain.
Rung 2: Bank Reserves and Institutional Capital
Commercial banks receive the new liquidity as reserves. They can't just sit on it—they need to deploy it to earn returns. This is where institutional investors come in.
Pension funds, endowments, family offices, and hedge funds start allocating to risk assets. They might buy stocks, bonds, commodities, or—increasingly—crypto through ETFs and other regulated products.
The key signal: institutional flow data, ETF inflows, and large transaction volumes on exchanges.
Rung 3: Crypto ETFs and Funds
For many institutions, crypto ETFs are the easiest entry point. They're regulated, familiar, and don't require custody solutions. When institutions allocate, they often start here.
ETF flows create direct buying pressure on underlying assets (like Bitcoin and Ethereum). This is why ETF flow data has become such an important indicator.
The key signal: daily ETF flow data, especially for Bitcoin and Ethereum ETFs.
Rung 4: Exchanges and Trading
Once money is in crypto ETFs or funds, it flows to exchanges where the actual trading happens. This is where price discovery occurs and where retail investors interact with the market.
Exchange volumes, order book depth, and trading activity all increase as liquidity flows down the ladder.
The key signal: exchange volume data, stablecoin market cap growth, and on-chain metrics.
Rung 5: Your Wallet
Finally, liquidity reaches individual wallets. This is when you see price appreciation, increased trading activity, and market excitement.
By this point, the early signals have already played out. Smart investors watch the earlier rungs of the ladder to position themselves before retail catches on.
Why This Matters
Understanding the liquidity ladder helps you:
- See market movements before they're obvious in price charts
- Understand why there's often a delay between macro events and crypto price movements
- Identify which signals to watch at different stages of the cycle
- Position yourself ahead of the crowd
The ladder isn't always linear—sometimes steps happen simultaneously or in different orders. But the general pattern holds: liquidity flows from central banks, through institutions, into crypto products, and finally to individual wallets.
Watch the early rungs, and you'll see the future before it arrives.