The moral commonly drawn from Zhuangzi’s butterfly dream is that there is no distinction between the subjectivity of the dreamer and the awake. It is, however, tenuous to incorporate this insight into an overall view of Zhuangzi, whether as a perspectival relativist, a mystic, or an anti-rationalist, just to name the more popular positions. The parable, despite its brevity and clarity, is difficult because the assertion about metaphysical distinction in the last two lines does not cohere with the preceding text about knowledge. To cope with this problem, there are recent interpretations that advocate textual revision or adumbrate a non-skeptical Zhuangzi. In this article, I shall evaluate these strategies and explain the discrepancy in understanding the butterfly dream. Besides employing the concept of self-locating belief to account for the paradox of waking and not-knowing, I shall also argue for an epistemic grounding of the metaphysical distinction.