Tim | March 18, 2025, 18:42

After nearly six months of liquidity contraction, the shift to a more accommodative environment may lead to a faster bottoming of crypto asset prices than most market participants anticipate.

Author: David Duong, CFA - Global Head of Research

Translated by: Tim, PANews

The market conditions over the past few weeks have shaken our confidence in a more positive outlook for the first quarter of 2025 (a view expressed in December 2024), as tightening liquidity and macroeconomic uncertainties have eroded investor confidence. The current market consensus appears to be generally pessimistic, reflected in the decline of the total market capitalization of cryptocurrencies below pre-U.S. election levels and the significant drop in perpetual contract funding rates. We do acknowledge that the speed and magnitude of this market correction have left many investors bewildered.

The current pessimism is primarily driven by concerns over the unstable trajectory of economic activity, especially after many investors had become overly focused on the "American Exceptionalism 2.0" narrative in recent months. In the crypto market, the momentum of unique positive factors seems to have slowed, causing anxiety among many market players. However, we believe that the current pessimism is an important signal that the market may bottom in the coming weeks, laying the foundation for new highs later in the year.

Note: American Exceptionalism is one of the core ideologies that have run through U.S. history, advocating that the United States has unique or even superior characteristics in terms of political system, values, and development path compared to other countries. This concept has shaped the national identity of the United States and profoundly influenced its domestic and foreign policies.

Global liquidity is beginning to recover, and the decline in real and nominal interest rates should ultimately help reduce borrowing costs. We also believe that long-term trends are likely to continue to support global growth in the future. That being said, we think that the crypto market will find it difficult to achieve an effective rebound before traditional risk assets recover, so we are closely monitoring whether there are any signs of capitulation in the U.S. stock market. Compared to survey data, the earnings season (in April) may provide a more accurate measure of the true situation of U.S. consumers. We will continue to maintain an optimistic outlook for the second quarter of 2025, but we advise investors to maintain a neutral stance on risk assets for now.

When Will the Bottom Be Reached?

Despite numerous recent positive developments in the crypto space, such as the repeal of SAB 121 and the formal establishment of Bitcoin strategic reserves, the crypto market has still performed weakly since the beginning of the year. Additionally, the SEC has recently withdrawn several lawsuits against multiple crypto entities, including Coinbase, and the Stablecoin Innovation and User Protection Act may be submitted for consideration by the U.S. House of Representatives and Senate in the summer of 2025.

Despite the regulatory good news, many market players are concerned that the unique catalysts in the crypto space are weakening. This has led to macro factors becoming the dominant force, with the correlation between the crypto market and U.S. stocks increasing. This is indeed the case, as the recent trend of traditional risk assets and the crypto market has clearly shown that our previous optimistic expectations for the first quarter of 2025 were clearly misjudged.

Coinbase Monthly Outlook: Liquidity Inflection Point Reached, Bitcoin May Bottom in the Coming Weeks

Concerns over a sharp slowdown or even a recession in the U.S. economy have led to a sharp shift in market sentiment, answering the question we posed in our previous monthly outlook: whether market participants would view the impact of tariffs as inflationary or deflationary. Currently, the expectations for the federal funds rate have shifted from pricing in only one rate cut in 2025 to three.

This sell-off has led to a cumulative decline of 25.5% in our Coinbase 50 (COIN50) Index year-to-date, with the total market capitalization of the crypto market evaporating by $532 billion. Interestingly, apart from the media and entertainment sector, the impact of market volatility on the various sub-sectors within the index is not significantly different. DeFi, Memecoin, and infrastructure sectors have all experienced similarly sharp corrections. This phenomenon highlights the widespread risk-averse sentiment in the entire market, with no selective consideration of the fundamentals and revenue-generating capabilities of different projects.

Coinbase Monthly Outlook: Liquidity Inflection Point Reached, Bitcoin May Bottom in the Coming Weeks

Overall, we believe that this quarter may mark the low point for crypto asset prices in 2025, as structural positive news—such as tax cuts, regulatory easing, and other stimulative fiscal policies—may be implemented later in the year. The current stablecoin balance has climbed to $229 billion (data source: DeFiLlama), indicating that a large number of investors are seeking refuge in stablecoins, pushing the market capitalization of stablecoins to 8.5% of the total crypto market capitalization (up from 6.3% at the beginning of the year). In addition, we believe that long-term trends such as artificial intelligence are likely to deliver on their promise of boosting economic productivity in the near future.

Perception Bias

Furthermore, we do not believe that the recent weakness in cryptocurrencies is abnormally divergent from the current macroeconomic tightening conditions. On the contrary, the real divergence is reflected in the performance difference between crypto assets and traditional risk assets from November 2024 (U.S. election) to January 20, 2025 (presidential inauguration). Despite the gradual tightening of liquidity conditions since the second half of 2024, the COIN50 Index, representing market prices, climbed by more than 67% during this period (see Chart 3).

Coinbase Monthly Outlook: Liquidity Inflection Point Reached, Bitcoin May Bottom in the Coming Weeks

If we focus on the total assets of the Federal Reserve's balance sheet, excluding reverse repos and the balance of the Treasury General Account (TGA), as a measure of market liquidity, this indicator has dropped from $6.2 trillion in early June 2024 to nearly $5.7 trillion at the beginning of 2025, a decline of over $500 billion (see Chart 4). Generally speaking, the expansion of the Federal Reserve's balance sheet injects liquidity into the market, while reverse repo operations help absorb excess liquidity in the banking system, and an increase in the TGA balance reduces the available cash levels in the financial system.

Liquidity is the lifeblood of any market, as it promotes investor participation, leverages the effect, and improves the price discovery mechanism, guiding savings funds to flow towards borrowers. Conversely, liquidity contraction often suppresses trading activity and can lead to significant price volatility. However, despite the continuous decline in liquidity in the second half of 2024, the core factor triggering the sharp fluctuations in crypto asset prices was the market's expectation of a significant shift in the U.S. regulatory environment—the U.S. election was a key event for investors with relatively binary outcomes. We believe that the recent crypto market sell-off largely reflects the return of prices to a low-liquidity trend.

Coinbase Monthly Outlook: Liquidity Inflection Point Reached, Bitcoin May Bottom in the Coming Weeks

In our view, this may be a potentially positive development. Over the past two months, the balance of the Treasury General Account (TGA) has dropped from $745 billion at the end of 2024 to $500 billion on March 12, 2025. This reduction has brought liquidity levels back above $6 trillion. Moreover, current bank reserve levels are close to 10-11% of GDP, which is generally considered sufficient to maintain financial stability. This means that the Federal Reserve may decide to pause or terminate its quantitative tightening policy at the Federal Open Market Committee (FOMC) meeting on March 18-19.

All of these signs indicate that market liquidity may be returning. The yield on the 10-year U.S. Treasury note is likely to decline further, as U.S. Treasury Secretary Bessent has clearly stated that the current administration is committed to reducing long-term interest rates. We believe it is best not to question his policy determination. From the perspective of the Federal Reserve's model, a decline in yields will increase the discounted value of future cash flows for risk assets such as stocks, an effect that may also drive up the prices of crypto assets.

Summary

The crypto market has recently faced significant challenges due to increased volatility and macroeconomic uncertainties. Despite this, we still believe that regulatory acceleration and increased institutional participation offer a more optimistic outlook for the coming months. Moreover, with liquidity shifting from contraction to accommodation after nearly six months, the bottoming of crypto asset prices may occur faster than most market participants expect. Therefore, we take a constructive stance on the crypto market for the second quarter of 2025. That being said, there are still limited short-term positive catalysts, and it is best to remain cautious for now.

Tim | March 18, 2025, 18:42

After nearly six months of liquidity contraction, the shift to a more accommodative environment may lead to a faster bottoming of crypto asset prices than most market participants anticipate.

Author: David Duong, CFA - Global Head of Research

Translated by: Tim, PANews

The market conditions over the past few weeks have shaken our confidence in a more positive outlook for the first quarter of 2025 (a view expressed in December 2024), as tightening liquidity and macroeconomic uncertainties have eroded investor confidence. The current market consensus appears to be generally pessimistic, reflected in the decline of the total market capitalization of cryptocurrencies below pre-U.S. election levels and the significant drop in perpetual contract funding rates. We do acknowledge that the speed and magnitude of this market correction have left many investors bewildered.

The current pessimism is primarily driven by concerns over the unstable trajectory of economic activity, especially after many investors had become overly focused on the "American Exceptionalism 2.0" narrative in recent months. In the crypto market, the momentum of unique positive factors seems to have slowed, causing anxiety among many market players. However, we believe that the current pessimism is an important signal that the market may bottom in the coming weeks, laying the foundation for new highs later in the year.

Note: American Exceptionalism is one of the core ideologies that have run through U.S. history, advocating that the United States has unique or even superior characteristics in terms of political system, values, and development path compared to other countries. This concept has shaped the national identity of the United States and profoundly influenced its domestic and foreign policies.

Global liquidity is beginning to recover, and the decline in real and nominal interest rates should ultimately help reduce borrowing costs. We also believe that long-term trends are likely to continue to support global growth in the future. That being said, we think that the crypto market will find it difficult to achieve an effective rebound before traditional risk assets recover, so we are closely monitoring whether there are any signs of capitulation in the U.S. stock market. Compared to survey data, the earnings season (in April) may provide a more accurate measure of the true situation of U.S. consumers. We will continue to maintain an optimistic outlook for the second quarter of 2025, but we advise investors to maintain a neutral stance on risk assets for now.

When Will the Bottom Be Reached?

Despite numerous recent positive developments in the crypto space, such as the repeal of SAB 121 and the formal establishment of Bitcoin strategic reserves, the crypto market has still performed weakly since the beginning of the year. Additionally, the SEC has recently withdrawn several lawsuits against multiple crypto entities, including Coinbase, and the Stablecoin Innovation and User Protection Act may be submitted for consideration by the U.S. House of Representatives and Senate in the summer of 2025.

Despite the regulatory good news, many market players are concerned that the unique catalysts in the crypto space are weakening. This has led to macro factors becoming the dominant force, with the correlation between the crypto market and U.S. stocks increasing. This is indeed the case, as the recent trend of traditional risk assets and the crypto market has clearly shown that our previous optimistic expectations for the first quarter of 2025 were clearly misjudged.

Coinbase Monthly Outlook: Liquidity Inflection Point Reached, Bitcoin May Bottom in the Coming Weeks

Concerns over a sharp slowdown or even a recession in the U.S. economy have led to a sharp shift in market sentiment, answering the question we posed in our previous monthly outlook: whether market participants would view the impact of tariffs as inflationary or deflationary. Currently, the expectations for the federal funds rate have shifted from pricing in only one rate cut in 2025 to three.

This sell-off has led to a cumulative decline of 25.5% in our Coinbase 50 (COIN50) Index year-to-date, with the total market capitalization of the crypto market evaporating by $532 billion. Interestingly, apart from the media and entertainment sector, the impact of market volatility on the various sub-sectors within the index is not significantly different. DeFi, Memecoin, and infrastructure sectors have all experienced similarly sharp corrections. This phenomenon highlights the widespread risk-averse sentiment in the entire market, with no selective consideration of the fundamentals and revenue-generating capabilities of different projects.

Coinbase Monthly Outlook: Liquidity Inflection Point Reached, Bitcoin May Bottom in the Coming Weeks

Overall, we believe that this quarter may mark the low point for crypto asset prices in 2025, as structural positive news—such as tax cuts, regulatory easing, and other stimulative fiscal policies—may be implemented later in the year. The current stablecoin balance has climbed to $229 billion (data source: DeFiLlama), indicating that a large number of investors are seeking refuge in stablecoins, pushing the market capitalization of stablecoins to 8.5% of the total crypto market capitalization (up from 6.3% at the beginning of the year). In addition, we believe that long-term trends such as artificial intelligence are likely to deliver on their promise of boosting economic productivity in the near future.

Perception Bias

Furthermore, we do not believe that the recent weakness in cryptocurrencies is abnormally divergent from the current macroeconomic tightening conditions. On the contrary, the real divergence is reflected in the performance difference between crypto assets and traditional risk assets from November 2024 (U.S. election) to January 20, 2025 (presidential inauguration). Despite the gradual tightening of liquidity conditions since the second half of 2024, the COIN50 Index, representing market prices, climbed by more than 67% during this period (see Chart 3).

Coinbase Monthly Outlook: Liquidity Inflection Point Reached, Bitcoin May Bottom in the Coming Weeks

If we focus on the total assets of the Federal Reserve's balance sheet, excluding reverse repos and the balance of the Treasury General Account (TGA), as a measure of market liquidity, this indicator has dropped from $6.2 trillion in early June 2024 to nearly $5.7 trillion at the beginning of 2025, a decline of over $500 billion (see Chart 4). Generally speaking, the expansion of the Federal Reserve's balance sheet injects liquidity into the market, while reverse repo operations help absorb excess liquidity in the banking system, and an increase in the TGA balance reduces the available cash levels in the financial system.

Liquidity is the lifeblood of any market, as it promotes investor participation, leverages the effect, and improves the price discovery mechanism, guiding savings funds to flow towards borrowers. Conversely, liquidity contraction often suppresses trading activity and can lead to significant price volatility. However, despite the continuous decline in liquidity in the second half of 2024, the core factor triggering the sharp fluctuations in crypto asset prices was the market's expectation of a significant shift in the U.S. regulatory environment—the U.S. election was a key event for investors with relatively binary outcomes. We believe that the recent crypto market sell-off largely reflects the return of prices to a low-liquidity trend.

Coinbase Monthly Outlook: Liquidity Inflection Point Reached, Bitcoin May Bottom in the Coming Weeks

In our view, this may be a potentially positive development. Over the past two months, the balance of the Treasury General Account (TGA) has dropped from $745 billion at the end of 2024 to $500 billion on March 12, 2025. This reduction has brought liquidity levels back above $6 trillion. Moreover, current bank reserve levels are close to 10-11% of GDP, which is generally considered sufficient to maintain financial stability. This means that the Federal Reserve may decide to pause or terminate its quantitative tightening policy at the Federal Open Market Committee (FOMC) meeting on March 18-19.

All of these signs indicate that market liquidity may be returning. The yield on the 10-year U.S. Treasury note is likely to decline further, as U.S. Treasury Secretary Bessent has clearly stated that the current administration is committed to reducing long-term interest rates. We believe it is best not to question his policy determination. From the perspective of the Federal Reserve's model, a decline in yields will increase the discounted value of future cash flows for risk assets such as stocks, an effect that may also drive up the prices of crypto assets.

Summary

The crypto market has recently faced significant challenges due to increased volatility and macroeconomic uncertainties. Despite this, we still believe that regulatory acceleration and increased institutional participation offer a more optimistic outlook for the coming months. Moreover, with liquidity shifting from contraction to accommodation after nearly six months, the bottoming of crypto asset prices may occur faster than most market participants expect. Therefore, we take a constructive stance on the crypto market for the second quarter of 2025. That being said, there are still limited short-term positive catalysts, and it is best to remain cautious for now.