Source: The Defi Report; Translated by: Wu Zhu, Golden Financial.
The year 2025 will be an important year. I am very pleased to Share with you our data-driven analysis and market insights.
To welcome 2025, insights on the "Altcoin Season" will be shared, along with current thoughts on macro issues for the coming year.
Has the Altcoin Season arrived?
Given Solana's outstanding performance in 2024, the meme coin frenzy, the resurgence of DeFi, and the recent rise of AI agents, some believe that the "Altcoin Season" has indeed arrived.
We disagree. Why?
We believe that SOL's excellent performance is largely a rebound from being severely undervalued in 2023.
The meme frenzy seems more like the DeFi summer of 2020 (a glimpse of the bull market coming in 2021).
The revival of DeFi (Aave, Hyperliquid, Aerodrome, Pendle, Ethena, Raydium, Jupiter, Jito, etc.) is real, but DeFi still feels quite niche. According to Kaito AI, it has seen a decline in its narrative share as an industry in 2024;
The rise of AI agents looks more like a glimpse of a 'copycat season' rather than something substantial.
It can be acknowledged that there is a large amount of bubble in the market. But the overall data does not lie.
Source: CoinGecko
Quick analysis:
In the previous cycle, the total market cap of cryptos grew by $431 billion in the fourth quarter of 2020. Bitcoin accounted for 71.5% of the increase. BTC's dominance peaked at 72% on January 3, 2021 (cycle peak).
In the current cycle, the total market cap of cryptos grew by $1.16 trillion in the fourth quarter. BTC accounted for 59.5% of the increase. BTC's dominance currently stands at 56.4%, slightly below the cycle peak of 60% set on November 21, 2024.
Now. One might think that Bitcoin's share of the total Market Cap of Cryptos in this cycle has grown little, suggesting that the altcoin season has arrived.
But take a look at what happened as we entered 2021 (the last year of the previous cycle):
From January 1, 2021, to May 11, 2021, the Market Cap of Cryptos grew by $1.75 trillion. Bitcoin accounted for only 31% of this increase, and its dominance fell to 44%.
From May 11, 2021, to June 30, 2021, the total Market Cap fell by nearly 50%. Bitcoin also dropped by about 50% during the same period.
Then the market rebounded, reaching a peak Market Cap of $3 trillion on November 8, 2021. Bitcoin accounted for only 38% of the second increase.
Key focus points:
While some believe this is the "Bitcoin cycle" (due to poor ETH performance, ETF dominance, strategic Bitcoin reserve hype, L2, etc.), data indicates that as we transitioned to 2021—the last year of the previous cycle—Bitcoin was actually stronger.
In the previous cycle, with the arrival of the new year, the "altcoin season" started with a bang. From January to May, ETH rose by 5.3 times. Avalanche increased by 12 times. SOL surged by 28 times during the same period. DOGE skyrocketed by 162 times. This is the true nature of the "altcoin season." During this period, Bitcoin's dominance fell by nearly 30%.
As mentioned earlier, we are now seeing some bubbles in the market. That said, we believe that the "altcoin season" has just begun - evidenced by Bitcoin's dominance falling from the cycle peak of 60% on November 21, 2024.
We predict that the total Market Cap of Cryptos will grow to 7.25 trillion USD next year (an increase of 113% from today). If 35% of the Capital Trend flows into BTC from now, the total Market Cap will reach 3.2 trillion USD, which means each BTC would be worth 0.162 million USD. In our optimistic scenario, we forecast a total Market Cap of 10 trillion USD for Cryptos. If 35% of the Capital Trend flows into BTC, the total Market Cap will reach 4.2 trillion USD, or 0.212 million USD per BTC. In our pessimistic scenario, we predict a total Market Cap of 5.5 trillion USD. If 35% of the Capital Trend flows into BTC, the total Market Cap will then be 2.6 trillion USD, equivalent to 0.131 million USD per BTC.
We expect that this year, 2.5 trillion USD will flow into non-BTC Assets - double that of the previous cycle in 2021. From another perspective: the total Market Cap of Solana, Avalanche, and Terra Luna was 0.677 billion USD on January 1, 2021. By the end of the year, they peaked at 146 billion USD. This represents an increase of 21,466%. Once again, we have not seen such a large-scale initiative before. This does not mean it will necessarily happen.
"The emergence of the altcoin season has various reasons. However, we believe that there are primarily four driving factors:
1) BTC wealth effect: BTC investors taking profits + seeking greater returns on the risk curve.
2) Media attention. More attention = more users entering Cryptos. Many people will invest in what they consider to be the "next Bitcoin."
3) Innovation. We typically see new and exciting use cases emerge late in the Cryptos cycles.
4) Macro/liquidity conditions/Federal Reserve policy - driving market sentiment and animal spirits.
Speaking of macro conditions...
If we want to have a proper 'altcoin season', we believe that macro and liquidity conditions must align with the increasing risk appetite of market participants.
Macroeconomic Framework for 2025
In this section, we will analyze some key economic drivers of risk assets like cryptocurrencies while considering the probabilities of various outcomes in 2025.
Inflation (PCE)
As we noted in the previous report, the Fed is concerned about inflation. Therefore, they adjusted this year's rate cut forecast from 4 to 2 at the November FOMC meeting. As a result, the market experienced a sell-off.
Our view on inflation:
We believe the Federal Reserve/market is leaning towards one side on the issue of inflation. Why? The main drivers of inflation during COVID-19 were 1) supply chain issues, and 2) wartime printing of money (fiscal policy) + zero interest rate policy (Federal Reserve).
Therefore, to predict a rebound in inflation, we need a catalyst. Some may point to oil. However, we believe Trump's "drill baby drill" policy is deflationary for oil prices (increasing supply should lead to falling prices). Others point to fiscal spending and the projected $1.8 trillion deficit in 2025. Tax cuts, deregulation, and tariffs are all fair game.
But there are also forces in our economy.Deflation.For example, AI and other technological innovations. Our population is aging—many baby boomers are retiring. Due to persistently low birth rates, our population is also decreasing. Now, we have strict border policies.
These are all deflationary. However, some still believe inflation will "return" to levels seen in the 1970s. When making these comparisons, they do not consider the differences in today’s economy, demographic structure, commodity markets, etc.
Therefore, our fundamental prediction is that the inflation rate will generally remain within the range we see today (2.4% PCE). It may even decline. We believe this would be beneficial for risk assets, as it could lead to rate cuts exceeding 2 times next year—something not currently priced in.
10-year yield.
The yield at the end of this year is 4.6%—which is exactly 1% higher than on September 16 when the Federal Reserve began to cut interest rates. Therefore, the Federal Reserve is attempting to ease monetary policy. However, the bond market has tightened monetary policy. Why? We believe there are three main driving factors:
Inflation. The bond market believes that the Federal Reserve's interest rate cuts may lead to a resurgence of inflation.
Concerns about fiscal spending and debt growth. The huge deficit has led to an increase in government bond issuance—which may cause a surplus in market supply. To attract buyers, interest rates must rise (unless the Federal Reserve intervenes as a buyer—we expect this to happen later this year).
Growth expectations. Due to Trump's policies (tax cuts and deregulation), economic growth is expected to accelerate in 2025, which may lead to rising inflation.
Our view on interest rates:
We believe, given the above concerns, that the bond market is fairly repricing the 10-year yield. We note that the Treasury needs to refinance more than one-third of all outstanding debt this year, most of which is at the short end of the curve—where there are more buyers—and Secretary Yellen preemptively took care of most of the refinancing in the last cycle. If the new Treasury Secretary Scott Bessent tries to pay down the debt, it could create a supply-demand imbalance at the long end of the curve and lead to a surge in yields.
We believe these risks are reasonable. But we also think the Federal Reserve has tools (quantitative easing) to control rising yields when necessary. We believe the Trump administration will do everything possible to increase asset prices.
We believe the 10-year yield will reach 3.5-4%. It may go lower. We again believe this is beneficial for risk assets.
Growth and the Standard & Poor's 500 Index.
Although data for the fourth quarter has not yet been published, growth in the first three quarters indicates that our economic growth rate for 2024 will be 3.1%. The latest GDP Now forecast from the Atlanta Federal Reserve shows a growth rate of 2.6% for next year.
Meanwhile, the Standard & Poor's 500 Index rose by 25% last year. It increased by 24% in 2023. The CAPE ratio (which measures the valuation relative to inflation-adjusted earnings over the past 10 years) is currently 37.04, significantly higher than the historical average of 17.19, suggesting a potential reversion in 2025.
However, we should not blindly assume that mean reversion is imminent. What if lowering taxes and deregulation increases revenues? What if automation boosts efficiency? Or what if expectations around these matters encourage market participants to buy stocks?
Notably, the CAPE ratio bottomed out in October 2022, approaching the peak valuation levels of 1929 (just before the Great Depression). We believe the nature of the modern global liquidity cycle may be distorting asset valuations—especially after the 2008 financial crisis. After all, governments around the world continue to print money to obscure the problems of an aging population—resulting in asset bubbles and giving rise to more and more zombie companies in the process.
Data: DeFi Report, Standard & Poor's 500 CAPE ratio (from multpl.com).
Our view on growth and the Standard & Poor's 500 Index:
We believe that this year's data may unexpectedly increase. However, it largely depends on whether Trump can push Congress to pass tax cuts and deregulation.
That said, we do not believe a recession is imminent. Although the CAPE ratio is high, we also do not think we are in a bubble. Our basic forecast is that the S&P 500 Index will grow by 12.8% this year.
Short-term view:
The labor market is cooling, with an unemployment rate of 4.3% (up from last year's 3.6%). The ISM Index is at 48.4, indicating a mild contraction in manufacturing (which accounts for 11% of GDP). Meanwhile, the Federal Reserve has cut rates three times, with the cutting cycle reaching 1%. The market currently expects a pause in rate hikes in January, with a rate cut probability of 88%. There are no FOMC meetings in February.
Therefore, the federal funds rate seems likely to remain at 4.25-4.5% at least until March. Additionally, the debt ceiling conflict looms as Secretary Yellen has stated that the Treasury will reach its borrowing cap between January 14 and January 23. Thus, we believe that the Treasury may have to tap into the TGA — the Treasury's operational account at the Federal Reserve, which can be accessed in emergencies. There are currently about 700 billion USD in that account. The Fed can also use reverse repo tools to release liquidity in emergencies.
Therefore, we anticipate some turbulence in the first quarter, ultimately leading to liquidity being injected by the Fed/Treasury, etc. We expect some fluctuations in the short term.
Conclusion
We believe that the "Altcoin Season" has just begun. However, we also think that macro and global liquidity conditions need to support an appropriate rotation of altcoins this year.
Of course, macro conditions are hard to predict. But we hope our analysis can help develop your own framework to understand how this year might unfold.
We believe there is no risk of interest rate hikes—the previous cycle ended in November 2021.
We believe there will be no risk of recession in the future (although some industries, such as commercial real estate, are still experiencing pain).
We believe that the Federal Reserve/market is in a position of overreach regarding inflation issues.
We believe there may be further signs of weakness in the labor market in the first quarter.
We believe that yields will decline later this year, and the Federal Reserve may buy US Treasury bonds while lowering interest rates (quantitative easing).
We still believe there is an upside risk this year because we view the market landscape with Trump coming to power during a period of rapid technological advancement as similar to the late 90s.
With the unfolding of the debt ceiling debate in the coming weeks, we expect some volatility/dramatic events.
The biggest risk is a black swan event, which would force the Federal Reserve to quickly cut interest rates, as the market could panic and sell off, eventually boosted by liquidity.
