Source: The Defi Report; Compiled by: Five Baht, Golden Finance

2025 will be an important year. I'm excited to share our data-driven analysis and market insights with you.

To kick off 2025, we’re sharing our thoughts on “copycat season,” as well as our current thoughts on the macro issues for the year ahead.

Given Solana’s stellar performance in 2024, meme coin mania, the resurgence of DeFi, and the recent rise of artificial intelligence agents, some believe that “altcoin season” has arrived.

We disagree. Why?

We believe that SOL’s outperformance is largely a severely underestimated rally in 2023;

The Meme mania looks more like the DeFi summer of 2020 (2021 A glimpse of the coming bull market);

The resurgence of DeFi (Aave, Hyperliquid, Aerodrome, Pendle, Ethena, Raydium, Jupiter, Jito etc.) is true, but DeFi still feels niche. Its narrative share as an industry declines in 2024, according to Kaito AI;

The rise of AI agents looks more like a glimpse of "copycat season" than the actual thing.

We can admit that there are a lot of bubbles in the market. But the overall numbers don't lie.

Source: CoinGecko

Quick analysis:

In the last cycle, The total cryptocurrency market capitalization increased by $431 billion in the fourth quarter of 2020. Bitcoin accounted for 71.5% of the gains. BTC dominance reached 72% on January 3, 2021 (cycle peak).

In the current cycle, the total cryptocurrency market capitalization increased by $1.16 trillion in the fourth quarter. BTC accounted for 59.5% of the gains. BTC dominance currently stands at 56.4% – just below the cycle peak of 60% set on November 21, 2024.

Now. You might think that BTC’s smaller share of total cryptocurrency market cap growth this cycle would mean that altcoin season is upon us.

But look what happened as we entered 2021, the last year of the previous cycle:

January 1, 2021 - 2021On May 11, the cryptocurrency market capitalization increased by $1.75 trillion. BTC accounted for only 31% of the gains. Dominance dropped 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 subsequently rebounded, reaching a peak market capitalization of $3 trillion on November 8, 2021. BTC accounted for only 38% of the second surge.

Key Points to Focus on:

While some believe this is “Bitcoin’s cycle” (due to ETH underperformance, ETF dominance, strategic Bitcoin reserve hype, L2, etc. ), but the data suggests that BTC is actually stronger as we transition to '21, the final year of the previous cycle.

In the last cycle, with the arrival of the New Year, the "copycat season" kicked off with a bang. From January to May, ETH increased 5.3x. Avalanche is up 12x. SOL has risen 28x over the same period. DOGE is up 162x. This is the true face of "copycat season". During this period, Bitcoin’s dominance dropped by almost 30%.

As mentioned before, we are seeing some froth in the market today. That being said, we believe “alt season” has only just begun – as evidenced by Bitcoin’s decline in dominance from its cycle peak of 60% on November 21, 2024.

We predict that total cryptocurrency market capitalization will grow to $7.25 trillion next year (a 113% increase from today). If 35% of funds flowed into BTC from now on, the total market cap would be $3.2 trillion, or $162,000 per BTC. Our optimistic scenario predicts a total cryptocurrency market capitalization of $10 trillion. If 35% of funds flowed into BTC, the total market cap would be $4.2 trillion, or $212,000 BTC. Our pessimistic case forecast total market capitalization is $5.5 trillion. If 35% of funds flowed into BTC, the total market cap would be $2.6 trillion, or $131,000 BTC.

We expect $2.5 trillion to flow into non-BTC assets this year—double the previous cycle in ’21. To look at it another way: Solana, Avalanche, and Terra Luna had a combined market capitalization of $677 million on January 1, 2021. They peaked at $146 billion at the end of the year. That’s a 21,466% gain. again. We have not seen such a large-scale initiative. That doesn't mean it will definitely happen.

There are many reasons for the emergence of "copycat season". But we believe there are 4 main drivers:

1) BTC wealth effect: BTC investors profit + seek greater returns on the risk curve.

2) Media attention. More attention = more users getting into cryptocurrency. Many people will invest in what they think is the “next Bitcoin”.

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

4) Macro/Liquidity Conditions/Fed – Drive 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 growing risks for market participants Preferences remain consistent.

In this section, we will analyze some of the key economic drivers of risk assets such as cryptocurrencies while considering the probabilities of various outcomes in 2025.

As we noted in our last report, the Fed is worried about inflation. As a result, they revised their forecast for rate cuts from four to two this year at the November FOMC meeting. The market sold off as a result.

Our view on inflation:

We think the Fed/markets are one sided on inflation. Why? The main drivers of inflation during COVID-19 are 1) supply chain issues, and 2) wartime money printing (fiscal) + zero interest rates (Fed).

So, to predict a pickup in inflation, we need a catalyst. Some might point to oil. But we think Trump's "drill baby drill" is deflationary for oil prices (increased supply should lead to lower prices). Others pointed to fiscal spending and a projected $1.8 trillion deficit in 2025. Tax cuts, deregulation, tariffs, all fair game.

But there are also deflationary forces in our economy. Such as 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 shrinking. Now we have strict borders.

These are deflations. However, some still believe inflation will "come back" to levels seen in the 1970s. They make these comparisons without taking into account differences in today's economies, demographics, commodity markets, etc.

Our base case therefore is that inflation remains broadly within the range we see today (2.4% PCE). It might even go down. We think this is positive for risk assets as it could lead to more than 2 rate cuts next year - which is not yet factored in.

Yields ended the year at 4.6% — a full 1% higher than on September 16, when the Fed began cutting interest rates. Therefore, the Fed is trying to loosen money. But the bond market tightened the currency. Why? We believe there are three main drivers:

Inflation. The bond market believes that the Fed's rate cuts could lead to a resurgence of inflation.

Fiscal spending concerns and debt growth. Large deficits lead to increased issuance of Treasury bonds—which can lead to oversupply in the market. To attract buyers, interest rates must rise (unless the Fed steps in as a buyer - which we expect to happen later this year).

Growth expectations. Economic growth will accelerate in 2025 due to Trump's (tax cuts, deregulation), which may lead to higher inflation.

Our views on rates:

We believe it is fair for bond markets to reprice 10-year yields given the concerns above. We note that the Treasury will need to refinance more than a third of all outstanding debt this year, much of which is on the short end of the curve—where there are more buyers—while Secretary Yellen said in the last cycle Most refinancings of . If new finance minister Scott Bessent attempts to pay down debt, it could create a supply-demand imbalance at the long end of the curve and send yields soaring.

We believe these risks are reasonable. But we also think the Fed has the tools (quantitative easing) to control rising yields if needed. We believe Trump will do whatever it takes to increase asset prices.

We see 10-year yields reaching 3.5-4%. It could go lower. Again we think this is positive for risk assets.

While fourth-quarter numbers are not yet available, growth in the first three quarters suggests we will have a 3.1% economic growth rate in 2024. The Atlanta Fed's latest GDP Now forecast puts growth at 2.6% next year.

Meanwhile, the S&P 500 rose 25% last year. That’s up 24% in ’23. The CAPE ratio, which measures valuation relative to inflation-adjusted earnings over the past 10 years, currently stands at 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 assume that mean reversion is imminent. What if lower taxes and deregulation would increase revenue? What if automation increases efficiency? Or will expectations of these things prompt market participants to buy stocks?

Notably, the CAPE ratio bottomed in October 2022, near peak valuation levels in 1929 (on the eve of the Great Depression). We believe the nature of the modern global liquidity cycle may be reversingQuantitative asset valuations – especially in the aftermath of the 2008 financial crisis. After all, countries around the world continue to cover up their aging populations by printing money—creating asset bubbles and spawning more and more zombie companies in the process.

Data: DeFi report, S&P 500 CAPE ratio (from multpl.com)

Our view on growth and S&P 500 views:

We think this year's numbers could surprise to the upside. But much will depend on whether Trump can push Congress to pass tax cuts and deregulation.

Having said that, we do not believe a recession is imminent. Despite the high CAPE ratio, we also don't believe we are in a bubble. Our base case forecast is for the S&P 500 to grow 12.8% this year.

Short-term view:

The labor market is cooling, with the unemployment rate at 4.3% (up from 3.6% last year). The ISM index stood at 48.4, indicating a modest contraction in the manufacturing sector (11% of GDP). At the same time, the Federal Reserve has cut interest rates three times, bringing the rate cut cycle to 1%. Markets currently expect a pause in interest rate hikes in January, with a rate cut of 88%. There is no FOMC meeting in February.

As a result, it appears that the federal funds rate will remain at 4.25-4.5% until March at the earliest. Additionally, the debt ceiling battle looms as Secretary Yellen says the Treasury Department will hit its borrowing limit between January 14 and January 23. As a result, we believe the Treasury may have to tap into the TGA - the Treasury's operating account at the Fed that can be tapped in an emergency. There are currently about $700 billion in the account. The Fed can also use its reverse repurchase facility to free up liquidity in an emergency.

As a result, we believe there may be some shocks in the first quarter that will ultimately lead to liquidity injections from the Fed/Treasury et al. We expect some volatility in the short term.

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

Of course, the macro picture is difficult to predict. But we hope our analysis helps you develop your own framework for how this year might unfold.

We believe that there is no risk of interest rate hikes - the last round of interest rate hike cycles ended in November 2021;

We do not believe that there will be a recession risk in the future (although some such as commercial real estate The industry is still experiencing pain);

We think the Fed/markets are offside on inflation;

We think the labor market may show further signs of weakness in the first quarter

We believe yields will fall later this year, and the Fed may purchase US Treasuries (quantitative easing) while lowering interest rates;

We still believe there is an upside this year Risk, as we believe the market landscape for Trump coming to power during a period of rapid technological advancement is different from that of the 1990s Similar to the end of the decade;

As the debt ceiling debate unfolds in the coming weeks, we expect some volatility/drama;

The biggest risk is a black swan event, which would force The Fed cuts rates quickly because markets may sell off in panic and then eventually be buoyed by liquidity.