Author: Michael Nadeau, The DeFi Report; Translated by: Tao Zhu, Golden Finance
The cryptocurrency market is at a turning point.
Just as many market participants did not fully appreciate the impact of rate hikes on risk assets in early ’22, we think the market may be underestimating the impact of rate cuts in ’24/’25.
Our view for much of this year has been that the market will continue to climb to the wall of worry before peaking in 25 years.
In this week’s report, we share our thoughts on how this situation might develop and how you can position yourself in the risk environment.
Has ETH/BTC hit bottom?
We believe ETH/BTC may have hit a cycle bottom.
6 reasons:
ETH/BTC has been making higher lows since 2016. The ratio bottomed out in early 2017 just below 0.01. In late 2019, the ratio bottomed out just below 0.02, and then bottomed out again during the March 2020 crash. Fast forward to September 2024, and ETH has just fallen below 0.04.
To me this shows that market confidence in ETH is growing over time. Let's see if it can sustain at 0.04.
In previous cycles, when ETH/BTC capitulated, it would set lows shortly thereafter. Over the past few months, the ratio appears to have capitulated, dropping from 0.057 to 0.038.
In past cycles, ETH bottomed out after a rate cut. The Fed started cutting rates a few weeks ago.
The same is true for the Fed balance sheet - last cycle we moved from net contraction to net expansion and ETH/BTC bottomed. We expect similar dynamics to play out this cycle as liquidity conditions improve.
Historically, Bitcoin’s dominance has declined as liquidity conditions have improved. Currently at 57% (near cycle highs).
From a sentiment perspective, ETH just went through a period of disillusionment that we haven’t seen in a long time (fees dropping due to EIP4844, “roadmap is a mess”). It’s market psychology and crypto Twitter’s impatience. The reality is that Ethereum continues to execute on its roadmap. Kyle Samani’s “Why SOL will flip ETH” speech at Token2049 seemed to mark the bottom for ETH/BTC.
If we are correct that ETH/BTC has bottomed, it means that the altcoin season has officially begun.
catalyst
It’s been interesting to watch the sentiment on crypto Twitter over the past few months. It seems like crypto natives are trying to get ahead of liquidity cycles by jumping to the far end of the risk curve (memecoins).
I'm sure many did well in the Oct-March period, but most were late and early into the alt season. After all, historically alt seasons have started after rate cuts. So my sense is that most markets gave back their gains in Q4 2023/Q1 2024. Many sold as the market fell. Others are reallocating.
“Retail investors will never come back.”
This is exactly what we need to see from a sentiment perspective. Now that the Fed has begun its rate-cutting cycle, there are several catalysts pointing to another breakout top in the market:
Allowing easing. When the Fed cuts rates, it effectively gives every other central bank in the world permission to cut rates. We are already seeing the ripple effect from this in China – which is currently stimulating its economy heavily. It looks like they are waiting for the Fed’s green light. To be clear, when the Fed cuts rates, the dollar weakens, reducing the risk of Chinese capital flying to the dollar – giving China more flexibility to cut rates while keeping its currency stable. This dynamic can apply to all central banks around the world.
Politics. I hate to talk about politics. But we have to address this because it really is important. At least in the short term. The key point here is that I believe Democrats have realized that crypto is not going away. Just look at what happened in '23. The year started with Operation Choke Point - the Biden administration's unconstitutional attempt to cut off crypto businesses from access to banks. It failed. And Bitcoin is up 187% for the year.
What happens if we elect a pro-cryptocurrency president? What happens if banks are allowed to custody cryptocurrencies? What happens if we get a stablecoin bill? What happens if the CFTC becomes the primary regulator of digital commodity crypto assets?
Has the market priced this in yet? Probably not yet. We would like to see progress on these fronts even if Trump loses.
ETFs. Is this the cycle where your average TradFi friend capitulates and buys some BTC/ETH? We think it’s possible. I remember having a conversation with my buddies in 2020 who were adamantly against Bitcoin. I remember telling them to keep an open mind and adding that I thought it might actually become risky to not hold any Bitcoin in the near future.
It may have sounded ridiculous at the time. But my question is: How many coping cycles does one need to watch before capitulation? If you consider yourself a serious investor, you have seen BTC/crypto rise in 2013, 2017, 2021, and now in 2024 (into 2025?).
Innovation. While crypto natives debate whether Solana “scaling” is L2 and whether we should incorporate L2 into Solana’s version of Ethereum, if you look beyond the surface there are a lot of cool things happening.
Bitcoin is starting to become more like Ethereum, with the DeFi and L2 ecosystems showing some promise.
Ethereum is scaling and executing on its roadmap. BlackRock has an on-chain money market fund and Visa just announced a tokenization platform on Ethereum.
Solana’s Firedancer is now live on testnet. Citigroup and Franklin Templeton announced plans to tokenize assets on Solana on Breakpoint. Paypal and Societe Generale have launched stablecoins on Solana.
Speaking of stablecoins — the issuer is now the 16th largest holder of U.S. Treasuries. We now have permissionless, yield-generating stablecoins.
Sentiment. Sentiment turned to extreme fear in early August. This is exactly what we need to see before the next big move, which we think is underway.
Altcoin season?
As mentioned earlier, we believe that ETH/BTC may have bottomed. This means that altcoin season may have officially begun — when long-tail risk assets outperform major assets.
The market has shown strength. Below is the 7-day sector performance provided by Artemis, with memecoins leading the way.
Some thoughts and/or predictions on how the cycle might play out:
ETH is significantly outperforming BTC, with BTC’s dominance well below 50%.
SOL is significantly outperforming ETH, SOL infrastructure is outperforming ETH infrastructure + Solana memecoins are outperforming Ethereum memecoins.
TIA and SUI emerge as the best performing “new L1s” on the market right now (keep an eye on Berrachain and Monad — expected to launch later this year).
Over 10 memecoins will reach $10B+ valuations (2 today). In fact, we may see $100B+ memecoins this cycle. *I will share my full in-depth view on memecoins in November.
AI Coins and DePIN may perform like NFTs in the previous cycle.
The supply of stablecoins grew to $500 billion ($160 billion today).
It goes without saying, but I'll say it anyway: I don't have a crystal ball. I'm just using pattern recognition as someone who has been watching these markets for a while. Risk on = central bank easing = USD flows into risk assets. If that happens, then outperformance should be at the far end of the risk curve (crypto). Everything else is instinct for identifying sectors, teams, communities, cycle dynamics, risks, etc.
in conclusion
Is it possible that the market has strayed away from the idea that we are in for another mania like we had in '21?
This is the question I keep asking myself right now. Why? Because crypto is truly a unique asset class, and bull runs can be just as volatile as big declines.
Bear markets tend to leave a psychological scar on market participants. As a result, it’s easy to forget how volatile a potential bull market can be.
Sure, there are a lot of bears out there. They're calling for a recession. But we don't see that in the data. Credit spreads are low. Banks are lending. Central banks are easing. Inflation is falling. The Treasury is spending. Unemployment fell last month.
