The Merrill Lynch Investment Clock is an asset allocation framework based on economic cycles that segments the economic cycle into four stages (Recovery, Overheating, Stagflation, Recession) by analyzing the trends of economic growth and inflation, recommending corresponding investment asset classes for each stage.
In the cryptocurrency field, due to its market characteristics and significant differences from traditional financial markets (such as high volatility, decentralization, policy impacts, etc.), we need to redefine a 'Crypto Merrill Lynch Clock' specifically for the cryptocurrency domain, incorporating the unique attributes and driving factors of the crypto market.
I. Four Stages of the Crypto Merrill Lynch Clock
1. Crypto Recovery
Market Characteristics:
Recovery in On-chain Activity: On-chain trading volume, active addresses, and total value locked (TVL) in decentralized finance (DeFi) are starting to rebound.
Investor Sentiment: Fear gradually dissipates (Fear and Greed Index shifts from extreme fear to neutral).
Macroeconomic Environment: Global liquidity easing, weakening dollar index, increasing preference for risk assets.
Policy Environment: Clear or lenient regulatory expectations, with institutions beginning to re-enter the market.
Technical Indicators: Prices of major cryptocurrencies like Bitcoin break through critical resistance levels (e.g., 200-day moving average), with technological innovations (e.g., Layer 2 expansions, protocol upgrades) boosting market confidence.
Recommended Assets:
Core Assets: Bitcoin (BTC), Ethereum (ETH), and other blue-chip cryptocurrencies, due to their strong risk resistance, making them suitable as the first choice for market recovery.
Growth Assets: Layer 1 public chain tokens (e.g., SOL, ADA, AVAX), due to their significant ecosystem expansion potential.
Stablecoin Hedge: Hold some stablecoins (e.g., USDT, USDC) to cope with volatility.
Investment Strategies:
Accumulate core assets on dips, focusing on early opportunities in emerging public chains and DeFi projects.
Participate in staking or liquidity mining for additional yields.
Monitor on-chain data (e.g., growth in active addresses, rising Gas fees) to confirm recovery trends.
2. Crypto Overheating
Market Characteristics:
Surge in On-chain Activity: Trading volume in areas such as DeFi, NFT, and GameFi has skyrocketed, with on-chain Gas fees soaring.
Investor Sentiment: Greed dominates (Fear and Greed Index enters extreme greed territory).
Macroeconomic Environment: Global risk assets boom, with retail and institutional investors experiencing heightened FOMO (Fear of Missing Out).
Policy Environment: Regulatory risks lurk, but the market temporarily ignores negative news.
Technical Indicators: RSI (Relative Strength Index) is overbought, altcoin prices are rapidly rising, marking the emergence of 'Altseason'.
Recommended Assets:
High-risk, high-return assets: Small to mid-cap altcoins, DeFi tokens, NFT-related projects, Metaverse/GameFi tokens.
Leverage Instruments: Perpetual contracts, options, and other derivatives (suitable for high-risk enthusiasts).
Meme Coins: Such as DOGE, SHIB, which may experience short-term spikes due to retail enthusiasm.
Investment Strategies:
Chase hot sectors (such as NFT, GameFi, AI + Blockchain), but set profit-taking points.
Reduce core asset holdings and increase allocations to small to mid-cap tokens.
Beware of market bubbles and monitor capital flows (such as whale wallet movements, net inflows to exchanges).
3. Crypto Stagflation
Market Characteristics:
Slowdown in On-chain Activity: Declining trading volume, stagnation in DeFi TVL growth, shrinking NFT trading volume.
Investor Sentiment: The market is in a wait-and-see mode, with the Fear and Greed Index trending towards a neutral but fearful state.
Macroeconomic Environment: Increased global economic uncertainty, tightening liquidity, strengthening dollar index.
Policy Environment: Heightened regulatory pressures (e.g., tax policies, anti-money laundering regulations), undermining market confidence.
Technical Indicators: Prices stagnate or slightly decline, with reduced volatility and a lack of clear market direction.
Recommended Assets:
Defensive Assets: Stablecoins (USDT, USDC, DAI) to mitigate volatility risks.
Core Assets: Bitcoin, Ethereum, due to their market dominance and relative stability.
Income-generating Assets: Participate in low-risk DeFi protocols (e.g., Curve, Aave) to obtain stable yields.
Investment Strategies:
Reduce leverage, decrease exposure to high-risk assets.
Hold stablecoins or participate in stablecoin mining to preserve value.
Monitor policy trends and on-chain data to identify market bottom signals.
4. Crypto Recession
Market Characteristics:
Lackluster On-chain Activity: Trading volume and TVL have significantly decreased, with NFT and altcoin markets nearing freezing point.
Investor Sentiment: Extreme fear, significant selling pressure, Fear and Greed Index at low levels.
Macroeconomic Environment: Global economic recession, risk assets declining across the board, liquidity extremely tight.
Policy Environment: High regulatory pressure (e.g., crypto bans, exchange restrictions), institutions retreating from the market.
Technical Indicators: Bitcoin falls below critical support levels, widespread altcoin crashes, frequent market liquidations.
Recommended Assets:
Safe-haven Assets: Stablecoins (USDT, USDC) or completely exiting the crypto market.
Core Assets: Hold a small amount of Bitcoin and Ethereum while waiting for market reversals.
Cash Equivalents: Fiat currency or other low-risk assets (e.g., gold).
Investment Strategies:
Cash is king, reduce exposure to crypto assets.
Focus on long-term value projects (e.g., Ethereum ecosystem, cross-chain protocols) to accumulate at low prices.
Monitor on-chain data and macro indicators (e.g., Federal Reserve policy, on-chain liquidation data) to assess the bottom.
II. Factors Driving the Crypto Merrill Lynch Clock
Unlike the traditional Merrill Lynch clock, which relies on economic growth and inflation, the crypto Merrill Lynch clock's cycle estimates are driven by the following factors:
On-chain data: Active addresses, trading volume, TVL, Gas fees, etc., reflecting market activity.
Investor Sentiment: Fear and Greed Index, social media heat, Google Trends, etc.
Macroeconomics: Dollar index, interest rate policies, global liquidity.
Regulatory Policies: Various countries' regulatory attitudes towards cryptocurrencies (e.g., U.S. SEC, EU MiCA regulations).
Technological Innovations: Such as Ethereum upgrades (e.g., The Merge, Dencun upgrade), Layer 2 expansions, cross-chain technologies, etc.
Market Structure: Bitcoin dominance (BTC Dominance), altcoin rotation, institutional participation.
↓Crypto Merrill Lynch Clock Illustration↓
III. Notes and Usage Methods
High Volatility: Crypto market volatility far exceeds traditional markets, and cycle transitions may be quicker, necessitating close monitoring of on-chain and market data.
Regulatory Risks: Policy changes could lead to abrupt cycle jumps (e.g., directly from overheating to recession).
Technology-Driven: Major technological upgrades (e.g., Ethereum sharding, Bitcoin Taproot) could trigger unexpected cycle shifts.
Data Tools: It is recommended to use tools like Dune Analytics, Glassnode, CryptoQuant to monitor on-chain metrics and assess market sentiment alongside the Fear and Greed Index.
Different market participants also use the Crypto Merrill Lynch Clock in various ways:
Investors: Adjust asset allocation according to the current market phase, balancing risk and return.
Traders: Capture short-term opportunities by utilizing the cycle switching window (e.g., from recovery to overheating).
Long-term Holders: Accumulate core assets at low prices during recession and recovery phases, ignoring short-term volatility.
DeFi Participants: Engage in high-yield protocols during recovery and overheating phases, while shifting to low-risk strategies during stagflation and recession.
Currently, based on May 2025 market data, the crypto market is in the 'Recovery' phase. On-chain activity (e.g., BTC trading volume, active addresses) has grown over 12%, DeFi TVL is stable, and investor sentiment has shifted from fear to neutral, with the Fear and Greed Index leaning towards neutrality. The confidence is boosted by Trump's administration and a relaxed SEC regulation, but macroeconomic factors (e.g., U.S. Q1 GDP contraction of 0.3%) and tariff policies bring volatility risks.
Recent strategies suggest prioritizing allocations to core assets like Bitcoin and Ethereum, while monitoring high-performance public chains (SOL). Accumulate on dips, participate in DeFi staking for yields, and set stop-loss orders to mitigate volatility. Use tools like Glassnode to monitor on-chain data, and be wary of regulatory and macro risks. Additionally, employ crypto options (Long Put) to prevent downside risks.
