Source: The Defi Report; Compiled by: Wuzhu, Golden Finance
2025 is going to be a big year, and I’m very excited to share our data-driven analysis and market insights with you.
As we head into 2025, we’re sharing our thoughts on “althouse season” and our current thoughts on macro issues for the year ahead.
Has the copycat season arrived?
Given Solana’s stellar performance in 2024, the meme coin craze, the resurgence of DeFi, and the recent rise of AI agents, some believe that “altcoin season” has arrived.
We disagree. Why?
We believe SOL's outstanding 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 upcoming bull market in 2021);
The renaissance 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 decreased in 2024;
The rise of AI agents looks 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 value of cryptocurrencies 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 value of cryptocurrencies grew by $1.16 trillion in the fourth quarter. BTC accounted for 59.5% of the increase. BTC's dominance is currently at 56.4%—slightly below the cycle peak of 60% reached on November 21, 2024.
Now. You might think that BTC's share of the total cryptocurrency market value growth in this cycle is small, which means 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 May 11, 2021, the market value of cryptocurrencies 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 value fell by nearly 50%. BTC dropped about 50% during this period.
The market then rebounded, reaching a peak market value of $3 trillion on November 8, 2021. BTC accounted for only 38% of the second increase.
Key focus points:
While some believe this is "Bitcoin's cycle" (due to ETH's underperformance, ETF dominance, strategic Bitcoin reserve speculation, L2, etc.), data indicates that as we transition into 2021—the last year of the previous cycle, BTC is actually stronger.
In the previous cycle, with the arrival of the new year, the "altcoin season" kicked off spectacularly. From January to May, ETH rose 5.3 times. Avalanche rose 12 times. SOL rose 28 times during the same period. DOGE rose 162 times. This is the true nature of the "altcoin season." During this time, Bitcoin's dominance dropped by nearly 30%.
As mentioned earlier, we see some bubble-like behavior in the market today. That said, we believe the "altcoin season" has just begun—the drop in Bitcoin's dominance from the cycle peak of 60% on November 21, 2024, is evidence of that.
We predict the total market value 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 value will reach $3.2 trillion, or $162,000 per BTC. Our optimistic scenario predicts the total market value of cryptocurrencies to be $10 trillion. If 35% of funds flow into BTC, the total market value will reach $4.2 trillion, or $212,000 per BTC. Our pessimistic scenario predicts a total market value of $5.5 trillion. If 35% of funds flow into BTC, the total market value will reach $2.6 trillion, or $131,000 per BTC.
We expect $2.5 trillion to flow into non-BTC assets this year—double that of the previous cycle in 2021. From another angle: the total market value of Solana, Avalanche, and Terra Luna was $677 million on January 1, 2021. It 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 necessarily happen.
"Altcoin season" arises for various reasons. However, we believe there are mainly 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 the cryptocurrency market. 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) Macroeconomic/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 market participants' increasing risk appetite.
2025 Macro Framework
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 our last report, the Fed is concerned about inflation. Therefore, they changed this year's rate cut forecast from 4 to 2 cuts at the FOMC meeting in November. As a result, the market sold off.
Our views on inflation:
We believe the Fed/market is biased in one direction on inflation issues. Why? The main drivers of inflation during COVID-19 were 1) supply chain issues and 2) wartime money printing (fiscal) + zero interest rate policy (the Fed).
Therefore, to predict a rebound in inflation, we need a catalyst. Some might point to oil. But we believe Trump's "drill baby drill" policy is deflationary for oil prices (increased supply should lead to price drops). 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, artificial intelligence and other technological innovations. Our population is aging—many baby boomers are retiring. Our population is also declining due to persistently low birth rates. Now we have strict border policies.
These are all deflationary. However, some still believe inflation will "make a comeback" to levels seen in the 1970s. When making these comparisons, they do not consider the differences in today's economy, demographics, commodity markets, etc.
Therefore, our baseline forecast is that inflation will remain around the level we see today (2.4% PCE) and may even decline. We believe this is favorable for risk assets, as it could lead to more than 2 rate cuts next year—which is currently not being considered.
10-year yield
By the end of this year, yields will be at 4.6%—a full 1% higher than on September 16, when the Fed began cutting rates. Therefore, the Fed is trying to ease monetary policy. However, the bond market is tightening monetary policy. Why? We believe there are three main driving factors:
Inflation. The bond market believes that Fed rate cuts 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 lead to market oversupply. To attract buyers, interest rates must rise (unless the Fed intervenes as a buyer—we expect this to happen later this year).
Growth expectations. Economic growth is expected to accelerate in 2025 due to Trump's policies (tax cuts, deregulation), which may lead to rising inflation.
Our views on interest rates:
We believe that given the concerns above, it is fair for the bond market to reprice the 10-year yield. We note that the Treasury needs to refinance more than one-third of all outstanding debt this year, much of which is at the short end of the curve—where there are more buyers—and Secretary Yellen did much of the refinancing in the last cycle in advance. If the new Treasury Secretary Scott Bessent attempts to pay down debt, it could create a supply-demand imbalance at the long end of the curve and lead to a spike in yields.
We believe these risks are reasonable. But we also believe the Fed has tools (quantitative easing) to control rising yields when necessary. We think the Trump administration will do everything possible to boost asset prices.
We believe the 10-year yield will reach 3.5-4%. It may go lower. We again believe this is favorable for risk assets.
Growth and the S&P 500 index
Although fourth-quarter data has not yet been released, growth in the first three quarters indicates a growth rate of 3.1% for our economy in 2024. The latest GDP Now forecast from the Atlanta Fed shows a growth rate of 2.6% for next year.
Meanwhile, the S&P 500 index rose 25% last year. It rose 24% in 2023. The CAPE ratio (which measures valuation relative to inflation-adjusted earnings over the past 10 years) is currently at 37.04, significantly higher than the historical average of 17.19, indicating a potential reversion in 2025.
But we should not blindly assume mean reversion is around the corner. What if tax cuts and deregulation increase revenues? What if automation improves efficiency? Or the expectation of these things prompts market participants to buy stocks?
It is worth noting that the CAPE ratio bottomed out in October 2022, approaching peak valuation levels seen in 1929 (just before the Great Depression). We believe the nature of modern global liquidity cycles may be distorting asset valuations—especially following the 2008 financial crisis. After all, governments around the world continue to print money to mask the aging population issue—leading to 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 views on growth and the S&P 500 index:
We believe this year's data may unexpectedly rise. 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. Although the CAPE ratio is high, 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 mild contraction in manufacturing (which accounts for 11% of GDP). Meanwhile, the Fed has cut rates three times, and the rate-cutting cycle has reached 1%. The market currently expects a pause in rate hikes in January, with an 88% chance of a rate cut. There is no FOMC meeting in February.
Therefore, the federal funds rate seems likely to remain at 4.25-4.5% at least until March. Moreover, the debt ceiling standoff is imminent, as Secretary Yellen indicated that the Treasury will hit the borrowing limit between January 14 and January 23. Therefore, we believe the Treasury may have to draw on the TGA—the Treasury's operating account at the Fed that can be accessed in emergencies. Currently, there is about $700 billion in that account. The Fed can also use reverse repo tools to release liquidity in emergencies.
Therefore, we believe some fluctuations may occur in the first quarter, ultimately leading to liquidity injections from the Fed/Treasury, etc. We expect some volatility in the short term.
Conclusion
We believe the "altcoin season" has just begun. But we also believe that macro and global liquidity conditions need to support a proper rotation into altcoins this year.
Of course, macroeconomic conditions are hard to predict. But we hope our analysis can help you develop your own framework to understand how this year may unfold.
We believe there is no risk of interest rate hikes— the last round of rate hikes ended in November 2021;
We believe there will be no 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 being outmaneuvered on 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, and the Fed may buy U.S. Treasury bonds (quantitative easing) while lowering interest rates;
We still believe there is an upside risk this year, as we think the market dynamics during Trump's rise amid rapid technological advancements are similar to those at the end of the 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 quickly lower rates, as the market may panic sell and then ultimately be buoyed by liquidity.
