Source: The Defi Report; compiled by Wuzhu, Golden Finance
2025 will be an important year. I am very pleased to share our data-driven analysis and market insights with you.
In anticipation of 2025, we will share our views on the 'altcoin season' and our current thoughts on macro issues for the coming year.
Has the altcoin season arrived?
Given Solana's strong performance in 2024, the meme coin frenzy, the revival of DeFi, and the recent rise of AI agents, some believe that the 'altcoin season' has arrived.
We disagree. Why?
We believe SOL's strong performance is largely a rebound from being severely undervalued in 2023.
The meme frenzy looks 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 niche. According to Kaito AI, its narrative share as an industry has declined in 2024.
The rise of AI agents seems more like a glimpse of the 'altcoin season' rather than something substantial.
We can acknowledge that there are significant bubbles in the market. But the overall data does not lie.
Source: CoinGecko
Quick analysis:
In the previous cycle, the total market capitalization of cryptocurrencies grew by $431 billion in Q4 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 capitalization of cryptocurrencies grew by $1.16 trillion in Q4. BTC accounted for 59.5% of the increase. BTC's dominance currently stands at 56.4%—slightly lower than the cycle peak of 60% reached on November 21, 2024.
Now. You might think that BTC's share of the total cryptocurrency market cap growth in this cycle is small, indicating that the altcoin season has arrived.
But look at what happened as we entered 2021 (the last year of the previous cycle):
From January 1, 2021, to June 30, 2021, the cryptocurrency market cap grew by $1.75 trillion. BTC accounted for only 31% of the increase. Its dominance fell to 44%.
From May 11, 2021, to June 30, 2021, the total market cap fell by nearly 50%. BTC dropped about 50% during the same period.
The market then rebounded, reaching a peak market cap of $3 trillion on November 8, 2021. BTC accounted for only 38% of the second surge.
Key focus points:
While some believe this is 'Bitcoin's cycle' (due to ETH's underperformance, ETF dominance, strategic Bitcoin reserve speculation, L2, etc.), the data suggests that as we transition into 21— the final year of the previous cycle, BTC is actually much stronger.
In the previous cycle, as the new year approached, the 'altcoin season' kicked off with a bang. From January to May, ETH rose by 5.3 times. Avalanche increased 12 times. SOL rose 28 times during the same period. DOGE surged 162 times. This is the true face of the 'altcoin season.' During this time, Bitcoin's dominance fell by nearly 30%.
As mentioned earlier, we are seeing some bubbles in the market today. That said, we believe the 'altcoin season' has just begun—the decline in Bitcoin's dominance from the cycle peak of 60% on November 21, 2024, is clear evidence.
We forecast that the total market capitalization of cryptocurrencies will grow to $7.25 trillion next year (an increase of 113% from today). If 35% of funds flow into BTC from now, the total market cap will reach $3.2 trillion, or $162,000 per BTC. Our optimistic scenario predicts a total market cap of $10 trillion for cryptocurrencies. If 35% of funds flow into BTC, the total market cap will reach $4.2 trillion, or $212,000 per BTC. Our pessimistic scenario predicts a total market cap of $5.5 trillion. If 35% of funds flow into BTC, the total market cap will reach $2.6 trillion, or $131,000 per BTC.
We expect $2.5 trillion to flow into non-BTC assets this year—twice that of the previous cycle in 21. From another perspective: Solana, Avalanche, and Terra Luna had a total market cap of $677 million on January 1, 2021. They peaked at $146 billion by the end of the year. This is a 21,466% increase. Again, we have not seen such large-scale initiatives before. This does not mean it will definitely happen.
There are multiple reasons for the emergence of the 'altcoin season.' But we believe there are four main drivers:
1) BTC wealth effect: BTC investors taking profits + seeking greater returns on the risk curve.
2) Media attention. More attention = more users entering cryptocurrency. Many will invest in what they think is the 'next Bitcoin.'
3) Innovation. We typically see new and exciting use cases emerge in the later stages of cryptocurrency cycles.
4) Macro/liquidity conditions/Fed policy—driving market sentiment and animal spirits.
Speaking of macro conditions...
If we want to have a proper 'altcoin season,' we believe macro and liquidity conditions must align with the increasingly risk-seeking behavior of market participants.
Macroeconomic Framework for 2025
In this section, we will analyze some key economic drivers for risk assets like cryptocurrencies, while considering the probabilities of various outcomes in 2025.
Inflation (PCE)
As we pointed out in our last report, the Fed is concerned about inflation. Therefore, they changed this year's rate cut forecast from 4 times to 2 times during the FOMC meeting in November. As a result, the market experienced a sell-off.
Our view on inflation:
We believe the Fed/market's stance on inflation issues is leaning towards one side. Why? The main drivers of inflation during COVID-19 were 1) supply chain issues, and 2) wartime money printing (fiscal) + zero interest rate policies (Fed).
Therefore, to predict a resurgence of inflation, we need a catalyst. Some might point to oil. But we believe Trump's 'drill baby drill' policy is deflationary for oil prices (increasing supply should lead to price declines). Others point to fiscal spending and the anticipated $1.8 trillion deficit in 2025. Tax cuts, deregulation, tariffs—are all fair game.
But there are also deflationary forces in our economy. For example, technological innovations like AI. Our population is aging—many baby boomers are retiring. Due to persistently low birth rates, our population is also declining. Now we have strict border policies.
These are all deflationary forces. However, some still believe inflation will 'return' to levels seen in the 70s. When making these comparisons, they fail to consider the differences in today's economy, demographics, commodity markets, etc.
Therefore, our baseline forecast is that inflation will remain largely at the levels we see today (2.4% PCE). It may even decline. We believe this is favorable for risk assets, as it could lead to more than 2 rate cuts next year—something that is not being factored in yet.
10-Year Yield
The yield at the end of this year is 4.6%—a full 1% higher than when the Federal Reserve began cutting rates on September 16. Thus, the Federal Reserve is attempting to loosen monetary policy. But the bond market has tightened monetary policy. Why? We believe there are three main drivers:
Inflation. The bond market believes that a Fed rate cut could lead to a resurgence of inflation.
Concerns over fiscal spending and rising debt. Huge deficits lead to increased issuance of government bonds—which could result in a market oversupply. To attract buyers, interest rates must rise (unless the Fed intervenes as a buyer—which we expect will happen later this year).
Growth expectations. Due to Trump's policies (tax cuts, deregulation), economic growth in 2025 may accelerate, potentially leading to rising inflation.
Our view on interest rates:
We believe it is fair for the bond market to reprice the 10-year yield given the concerns mentioned above. We note that the Treasury needs to refinance over one-third of all outstanding debt this year, most of which is at the short end of the curve—where there are more buyers—while Secretary Yellen conducted most of the previous cycle's refinancing in advance. If the new Treasury Secretary Scott Bessent attempts to pay down debt, it could create an imbalance of supply and demand at the long end of the curve, leading to a spike in yields.
We believe these risks are reasonable. But we also believe the Fed has the tools (quantitative easing) to control rising yields when necessary. We believe the Trump administration will do everything possible to boost asset prices.
We believe the 10-year yield will reach 3.5-4%. It may trend lower. We again believe this is favorable for risk assets.
Growth vs. S&P 500 Index
While Q4 data has yet to be released, growth in the first three quarters indicates a 3.1% growth rate for our economy in 2024. The latest GDP Now forecast from the Atlanta Federal Reserve Bank shows a growth rate of 2.6% for next year.
Meanwhile, the S&P 500 index rose 25% last year. It increased 24% in 2023. The CAPE ratio (which measures the valuation of past 10 years relative to inflation-adjusted earnings) is currently at 37.04, well above the historical average of 17.19, indicating a possible reversion in 2025.
But we shouldn't blindly assume that mean reversion is imminent. What if tax cuts and deregulation increase income? What if automation improves efficiency? Or what if the expectations of these things prompt market participants to buy stocks?
Notably, the CAPE ratio bottomed in October 2022, close to peak valuation levels from 1929 (just before the Great Depression). We believe the nature of modern global liquidity cycles may be distorting asset valuations—especially after the 2008 financial crisis. After all, governments around the world continue to print money to mask aging population issues—resulting in asset bubbles and giving rise to an increasing number of zombie companies in the process.
Data: DeFi Report, S&P 500 CAPE ratio (from multpl.com)
Our view on growth and the S&P 500 index:
We believe this year's data could surprise on the upside. But 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. Despite the high CAPE ratio, we also do not believe we are in a bubble. Our baseline 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 3.6% last year). The ISM index is at 48.4, indicating a moderate contraction in manufacturing (which accounts for 11% of GDP). Meanwhile, the Federal Reserve has cut interest rates three times, with the easing cycle reaching 1%. The market currently expects a pause in rate hikes in January, with a probability of 88%. There is no FOMC meeting in February.
Therefore, the federal funds rate seems likely to remain between 4.25-4.5% at least until March. Additionally, the debt ceiling standoff is imminent, as Secretary Yellen has indicated that the Treasury will hit its borrowing limit between January 14 and January 23. Thus, we believe the Treasury may have to tap the TGA—Treasury's account at the Fed, which can be accessed in emergencies. There are currently about $700 billion in that account. The Fed can also use reverse repo tools to release liquidity in emergencies.
Therefore, we believe some volatility may occur in the first quarter, ultimately leading to liquidity injections from entities like the Federal Reserve/Treasury. We expect some fluctuations in the short term.
Conclusion
We believe the 'altcoin season' has only just begun. But we also believe that macro and global liquidity conditions need to support a proper rotation into altcoins this year.
Of course, macro conditions are difficult to predict. But we hope our analysis helps you build your own framework to understand how this year might unfold.
We believe there is no risk of rate hikes—the last round of rate hikes ended in November 2021;
We believe there will not be a risk of recession in the future (although some sectors like commercial real estate are still experiencing pain);
We believe the Fed/market is in a position of overreach regarding inflation issues;
We believe the labor market may show further signs of weakness in the first quarter;
We believe yields will decline later this year, with the Fed possibly buying U.S. Treasuries (quantitative easing) while suppressing interest rates;
We still believe there is upside risk this year, as we think the market dynamics during Trump's presidency at a time of rapid technological advancement resemble those of the late 1990s;
As the debt ceiling debate unfolds in the coming weeks, we expect some volatility/dramatic events;
The biggest risk is a black swan event that would force the Fed to rapidly cut rates, as the market may panic and sell off, ultimately boosted by liquidity.
