Have we entered the altcoin season?

Source: The Defi Report; Compilation: Wuzhu, bitchain vision

2025 will be a big year.I am very happy to share with you our data-based analysis and market insights.

To welcome 2025, we will share our views on the “Box Season” and our current thoughts on macro issues in the coming year.

Is the copycat season already here?

Given Solana’s outstanding performance in 2024, meme coin fanaticism, the revival of DeFi and the recent rise of AI agents, some believe that the “altcoin season” has arrived.

We disagree.Why?

We believe that SOL’s outstanding performance is largely a heavily undervalued rebound in 2023;
Meme fanatic looks more like a DeFi summer in 2020 (a glimpse of the upcoming bull market 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 share of narrative as an industry has declined in 2024;
The rise of AI agents looks more like a glimpse of the “copy season” than something actual.

We can admit that there is a lot of bubbles in the market.But the overall data won’t lie.

Source: CoinGecko

Quick analysis:

In the last cycle, the total market value of cryptocurrencies increased by $431 billion in the fourth quarter of 2020.Bitcoin accounts for 71.5% of the gains.BTC’s dominance reached 72% (cycle peak) on January 3, 2021.
In the current cycle, the total market value of cryptocurrencies increased by $1.16 trillion in the fourth quarter.BTC accounts for 59.5% of the gains.BTC’s dominance is currently 56.4% — slightly below the 60% cycle peak set on November 21, 2024.

Now.You might think that BTC has a smaller share of the total market capitalization growth of cryptocurrencies in this cycle, which means the altcoin peak season has arrived.

But look at what happens when we enter 2021 (the last year of the previous cycle):

From January 1, 2021 to May 11, 2021, the market value of cryptocurrencies increased by $1.75 trillion.BTC accounts for only 31% of the gains.Dominance fell to 44%.
From May 11, 2021 to June 30, 2021, the total market value fell by nearly 50%.BTC fell by about 50% during the same period.
The market then rebounded, reaching a peak of $3 trillion by November 8, 2021.BTC accounts for only 38% of the second increase.

Key points of concern:

While some people think it is a “cycle of Bitcoin” (due to poor performance of ETH, dominance of ETFs, strategic Bitcoin reserve hype, L2, etc.), the data suggests that as we transition to 21 years – the previous cycleIn the last year, BTC was actually stronger.
In the last cycle, with the arrival of the New Year, the “Copycat Season” kicked off with great momentum.From January to May, ETH rose 5.3 times.Avalanche has risen 12 times.SOL rose 28 times in the same period.DOGE has risen 162 times.This is the true face of “Copycat Season”.Bitcoin’s dominance fell by nearly 30% during this period.
As mentioned earlier, we see some bubbles appearing in the market today.Having said that,We believe that the “copy season” has just begun – the decline in Bitcoin’s dominance from its 60% cycle peak on November 21, 2024 is proof of this.
We predict that the total cryptocurrency market capitalization will grow to $7.25 trillion next year (113% increase from today).If 35% of the money goes to BTC from now on, the total market capitalization will reach $3.2 trillion, or $162,000 per BTC.Our optimistic scenario predicts a total market capitalization of cryptocurrencies of $10 trillion.If 35% of the funds flow to BTC, the total market capitalization will reach $4.2 trillion, or $212,000 BTC.Our pessimistic situation predicts a total market capitalization of $5.5 trillion.If 35% of the funds flow to BTC, the total market capitalization will reach $2.6 trillion, or $131,000 BTC.
We expect $2.5 trillion to flow into non-BTC assets this year — twice the previous cycle in 21 years.From another perspective: Solana, Avalanche and Terra Luna had a total market capitalization 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 a large-scale move.This doesn’t mean it will happen.
There are many reasons for the emergence of “copycat season”.But we think there are 4 main drivers:

1) BTC Wealth Effect: BTC Investors Make Profit + Seek greater returns on the risk curve.

2) Media attention.More attention = More users enter cryptocurrency.Many people will invest in what they consider to be the “next bitcoin”.

3) Innovation.We usually see new and exciting use cases appearing later in the cryptocurrency cycle.

4) Macro/Liquidity Conditions/Federal Policy- Promote market sentiment and animal spirit.

Speaking of macro conditions…

If we want to have an appropriate “altcoin season”, we believe that macro and liquidity conditions must be aligned with the growing risk appetite of market participants.

2025 macro framework

In this section, we will analyze some of the key economic drivers of risky assets such as cryptocurrencies, while thinking about the probability of various results in 2025.

Inflation (PCE)

As we noted in our previous report, the Fed is concerned about inflation.So, they changed their forecast for this year’s rate cut from 4 to 2 at the FOMC meeting in November.As a result, the market sold out.

Our view on inflation:

We believe the Fed/market position on inflation is one side.Why?The main drivers of inflation during COVID-19 are 1) supply chain issues, and 2) wartime money printing (fiscal) + zero interest rate policy (Federal).

Therefore, to predict a rebound in inflation, we need a catalyst.Some may point out oil.But we think 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 estimated $1.8 trillion deficit in 2025.Tax cuts, deregulation, and tariffs are all fair games.

But our economy also has the power of deflation.For example, artificial intelligence and other technological innovations.Our population is aging – many baby boomers are retiring.As birth rates continue to be low, our population is also declining.Now we have strict border policies.

These are deflation.However, some still believe inflation will “come back” to the level of the 1970s.They made these comparisons without taking into account the differences between today’s economy, demographic structure, commodity markets, etc.

Therefore, our basic forecast is that inflation remains basically within the range of the levels we see today (2.4% PCE).It may even drop.We think this is good for risky assets as it could lead to a rate cut of more than 2 times next year – and that’s not taken into account yet.

10-year rate of return

The yield ended this year was 4.6% — a full 1% higher than September 16, when the Fed began cutting interest rates.Therefore, the Fed is trying to relax monetary policy.But the bond market has tightened monetary policy.Why?We believe there are three main drivers:

inflation.The bond market believes that the Fed’s interest rate cut could lead to a comeback of inflation.
Fiscal expenditure concerns and debt growth.The huge deficit has led to an increase in the issuance of Treasury bonds – which may lead to a market oversupply.To attract buyers, interest rates must rise (unless the Fed step in as a buyer – we expect that to happen later this year).
Growth expectations.Economic growth accelerated in 2025 due to Trump’s policies (tax cuts, deregulation), which could lead to higher inflation.

Our view on interest rates:

We believe that it is fair to reprice the bond market for 10-year yields in light of the above concerns.We have noticed that the Treasury needs to refinance more than a third of all outstanding debt this year, most of which are at the short end of the curve – there are more buyers there – and Minister Yellen in the last cycleMost of the refinancing was carried out in advance.If new Treasury Secretary Scott Bessent tries to pay off debt, it could create a supply and demand imbalance at the long end of the curve and lead to a surge in yields.

We believe these risks are justified.But we also believe that the Fed has tools (quantitative easing) to control the rise in yields when needed.We believe the Trump administration will do everything possible to increase asset prices.

We believe that the 10-year yield is 3.5-4%.It may go lower.Once again, we believe this is good for risky assets.

Growth and S&P 500 Index

While the fourth quarter data has not been released yet, growth in the first three quarters suggests that our economic growth rate is 3.1% in 2024.Atlanta Federal Reserve’s latest GDP Now forecast shows growth rate of 2.6% next year.

Meanwhile, the S&P 500 rose 25% last year.It has risen 24% in 23 years.The CAPE ratio (a measure of the valuation of the last 10 years relative to inflation-adjusted returns) is currently 37.04, which is significantly higher than the historical average of 17.19, indicating a possible regression in 25 years.

But we should not blindly believe that mean regression is coming.What if tax reduction and deregulation increase income?What if automation improves efficiency?Or will expectations of these things prompt market participants to buy stocks?

It is worth noting that the CAPE ratio bottomed out in October 2022, approaching its peak valuation level in 1929 (the eve of the Great Depression).We believe that 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 cover up the aging population by printing money – thus creating an asset bubble, and in the process spawning more and more zombie enterprises.

Data: DeFi Reports, S&P 500 CAPE Ratio (from multpl.com)

Our perspective on growth and the S&P 500:

We think this year’s data could be a surprising increase.But it depends largely on whether Trump can push Congress to pass tax cuts and deregulation.

That being said, we don’t think a recession is coming.Despite the high CAPE ratio, we don’t think we are in the bubble either.Our basic forecast is that the S&P 500 will grow 12.8% this year.

Short-term view:

The labor market is cooling with unemployment at 4.3% (up from 3.6% last year).The ISM index is 48.4, indicating a moderate contraction in manufacturing (11% of GDP).Meanwhile, the Fed has cut interest rates three times, with a 1% interest rate cut cycle.The market is currently expected to suspend interest rate hikes in January with a rate cut of 88%.There were no FOMC meetings in February.

As a result, the federal funds rate appears to remain at 4.25-4.5% as early as March.Furthermore, the dispute over debt ceiling is imminent, as Secretary Yellen said the Treasury will reach the loan ceiling between January 14 and January 23.Therefore, we think the Treasury may have to use the TGA—the Treasury’s operating account in the Federal Reserve, which can be used in emergencies.There are currently about $700 billion in the account.The Fed can also use reverse repurchase tools to release liquidity in emergencies.

Therefore, we thinkThere may be some volatility in the first quarter, which will eventually lead to the injection of liquidity by the Federal Reserve/Treasury Department, etc.We expectThere will be some fluctuations in the short term.

in conclusion

We think the “altcoin season” has just begun.But we also believe that macro and global liquidity conditions need to support appropriate rotation of altcoins this year.

Of course, the macro is difficult to predict.But we hope our analysis will help you develop your own framework to see how this year may evolve.

We believe there is no risk of interest rate hikes – the last interest rate hike cycle ended in November 2021;
We don’t think there will be a recession risk in the future (although some industries such as commercial real estate are still experiencing pain);
We think the Fed/market is offside on inflation;
We believe the labor market may show signs of further weakness in the first quarter;
We believe yields will fall later this year, and the Fed may buy U.S. Treasury bonds while driving down interest rates (quantitative easing);
We still think there is upside risk this year because we think Trump’s market landscape in a period of rapid technological advancement is similar to that in the late 1990s;
As the debt ceiling debate unfolds in the coming weeks, we expect some volatility/drama;
The biggest risk is the black swan event, which will force the Fed to cut interest rates quickly as the market may sell out in panic and then eventually be boosted by liquidity.