Article reproduced from: Golden Finance
Source: Pantera Capital Blockchain Letter, April 2025
Author: Cosmo Jiang, Partner at Pantera Capital; Translator: AIMan@Golden Finance
In 2025, a series of events occurring in the cryptocurrency space and the broader macro environment have impacted the market. Major macro forces are clearly dominating, leading to a sustained retreat in risk appetite across most sectors and asset classes. While digital assets are at the forefront of growth investments, they are far from immune to their effects.
2025 started optimistically, with political attitudes shifting towards cryptocurrencies, driving crypto prices up from the November elections last year to January this year. However, after Bitcoin and Solana hit all-time highs in January, Trump's inauguration turned into a typical 'buy the rumor, sell the news' scenario. The S&P 500 index and Bitcoin both fell by 15-20% (although Bitcoin has since recovered somewhat). But looking internally, high-growth and small-cap stocks performed worse. For example, the second-largest token, Ethereum, dropped by 47%. This pullback can mainly be attributed to macro factors and some unique issues related to digital assets.
From a macro perspective, the market is worried about increasing policy uncertainty and stagflation, a combination of slowing economic growth and rising inflation. Trump continues to push his tariff agenda (currently, 'reciprocal' tariffs above a 10% benchmark rate are suspended for 90 days, excluding China), which has already lowered consumer confidence, corporate profits, and GDP forecasts. This began with his first executive order on inauguration day, but it wasn't until February 1 that the first round of tariffs against Mexico, Canada, and China took effect that the market truly took notice of him. Since then, every major tariff announcement has caused the market to drop, culminating on April 2's 'Liberation Day.'
While tariffs have been the biggest driver of price movements, other adverse factors have also emerged, such as the Department of Government Efficiency (DOGE). The impact of DOGE is difficult to quantify, but qualitatively, it has had a significant impact on the mindset of government employees and businesses serving the government. Given that government spending has accounted for 23% of GDP in recent years and 25% of new jobs, any spending cuts driven by DOGE will have a tangible short-term impact on the economy. Regardless of whether these policies are good or bad, the speed and magnitude of their changes are starkly different from previous administrations. The market is concerned about uncertainty, and we have already seen the default reaction: sell-offs and taking more defensive positions.
Additionally, from the perspective of fundamental growth, the stock market had previously been supported by optimistic sentiment around unlimited demand for AI hardware. However, this optimism was dampened as the market began to digest the impact of DeepSeek's achievements. All publicly traded stocks related to AI - as well as AI-related tokens - faced significant sell-offs, many of which fell by over 50%.
The digital asset industry also faces some unique challenges. The first is the bursting of the memecoin bubble. This wave of decline began after Trump launched his own memecoin, and the situation accelerated after the scandal involving Argentine President Javier Milei and the manipulated LIBRA memecoin.
There has been much debate about whether these events are good or bad - perhaps both. The positive side is that high-profile figures like Trump are bringing attention and new users to the space, inspiring imitators from the Web2 world. Tokens are the most disruptive form of capital formation we have seen, and I hope this inspires more creative and effective token issuances in the future.
On the other hand, Memecoins reinforce the perception of cryptocurrencies among the average observer: they are filled with scams and are a joke, which harms the reputation of serious developers building cryptocurrencies. They also siphon off liquidity and attention from other tokens. Moreover, due to their speculative nature, once the frenzy subsides, it becomes difficult for other tokens to recover.
The second major exceptional event of this quarter was the hacking of Bybit, the world's second-largest exchange. Although there was no loss of customer funds - Bybit successfully compensated for the loss - it still undermined confidence in the overall market structure.
When you put all these events together, you can see how they drag down the market.
Cryptocurrency price performance
This sell-off was widespread. In the first quarter, the median price of tokens fell by more than 50%, and nearly 100% of tokens have declined in price this year. It is worth noting that this price trend is similar to that of the S&P 500 index and its underlying components.
We believe that the market is increasingly focusing on tokens with solid fundamentals, and we see this trend reflected in relative performance. Year-to-date, tokens with solid fundamentals (i.e., those with revenue and cash flow) have outperformed tokens without revenue by 8 percentage points. The performance of Memecoins and AI has also lagged behind other tokens.
While this may be painful, we believe that capital destruction of fundamentally worthless tokens is healthy.
Price performance, placed in historical context
We have experienced many similar pullbacks before. This is common in a broader bull market.
During the previous uptrend from 2020 to 2022, BTC experienced five significant pullbacks of over 20%. Other tokens saw pullbacks of 40% to 50%. Even in strong markets, this situation can occur.
In the current long-term uptrend, we have experienced three such pullbacks, including the one we are in now. Each time, being shaken out was a mistake. In fact, over the past week, Bitcoin's price has rebounded to $95,000, with most of the increase occurring on Wednesday. For those with a long-term investment perspective, being able to endure this volatility is a huge advantage.
When analyzing the quarterly changes in cryptocurrency market capitalization, significant drops are usually followed by strong rebounds, as indicated by the arrows.
Q1 2025 is the worst quarter for cryptocurrencies since the summer of 2022, when the market experienced a comprehensive downturn. While past experiences may not predict the future, strong rebounds almost always follow significant drops - although the extent of the rebound depends on current market conditions and, crucially, whether the overall trend can maintain an upward trajectory.
Be greedy when others are fearful?
On April 15, 2025, I hosted a crypto market outlook conference call to discuss my views on the cryptocurrency market. I talked about some indicators that track market sentiment, which we believe have reached historical highs, indicating that some of the worst phases of selling have passed. While the market has indeed rebounded from the bottom, I would like to share my thought process on how I monitor market sentiment:
"The U.S. Economic Policy Uncertainty Index is at its highest level in 40 years, similar to levels during the COVID-19 pandemic, and higher than at any time since the survey began in the 1980s, including above levels seen during the 9-11 events and the 2008 financial crisis.
Uncertainty leads risk allocators to retreat. At this critical moment, you need to ask yourself whether the environment will become more uncertain. From a historical perspective, this situation seems unlikely to occur; rather, we should be reverting to the mean.
"The crypto fear and greed index considers various factors such as technical momentum and social media sentiment to calculate an overall index score reflecting the level of greed and fear among market participants.
"During the sell-off, we once again fell into extreme fear levels that have not been seen since the bear market lows and the FTX collapse at the end of 2022. Whenever the market reaches such extreme levels, negative sentiment typically signals a local bottom in prices and a good entry point for future returns.
Next is the financing rate for Bitcoin futures, which indicates the ratio of long and short participants in the futures market. The financing rate for Binance Bitcoin futures indicates that there are more short positions than long positions in this market. This situation only occurs during market downturns in previous cycles, typically happening before significant rebounds, as seen at the end of 2023 and the end of 2024.
The last indicator is the American Association of Individual Investors (AAII) investor sentiment survey - a weekly survey conducted by the AAII showing that over 60% of investors hold a pessimistic view of the next six months. This has only occurred three times since the survey began in the 1980s, specifically during the significant market pullbacks of 1990, 2008, and 2022.
Summarizing the current market sentiment, these charts show that whether focusing specifically on cryptocurrency sentiment, native crypto positions and leverage, or broader retail investor sentiment and policy uncertainty, all have reached extreme historical levels. We expect that we may have passed the initial phase of aggressive selling based on this sentiment.
- Cosmo Jiang, General Partner at Pantera Capital, Crypto Market Outlook Conference Call
The impact of macro events on cryptocurrencies
Interest rates and liquidity conditions favor risk assets
At the same time, favorable interest rate and liquidity conditions benefit risk assets.
The yield on 10-year U.S. Treasury bonds peaked in 2023 and has been steadily declining, with a sharp drop in recent days. Interest rates may remain high for longer and could continue to do so in the context of high inflation, but more importantly, the overall trend is downward. The Trump administration - especially Treasury Secretary Yellen - has discussed the importance of lowering long-term interest rates, and their policy actions aim to achieve this goal. Lower long-term interest rates are crucial for the U.S. to maintain spending financing and are favorable for risk asset valuations.
Global liquidity conditions are also continuing to increase. After a period of tightening, Europe and China are currently implementing stimulus measures. We may be about to shift towards quantitative easing. In recent weeks, Treasury Secretary Yellen and Federal Reserve Governor Collins have both spoken on this matter in response to the turmoil in the bond market caused by soaring long-term bond yields. Their natural response will be to provide liquidity support, with the world's largest economies working together. Increased liquidity favors risk assets.
If we compare global liquidity with Bitcoin prices, it becomes clear that the major upward trend in Bitcoin prices occurs during periods of increasing liquidity. Conversely, during periods of stress typically caused by tightening liquidity, Bitcoin tends to fall along with all other assets. Therefore, we believe that the rise in global liquidity is an important indicator to monitor.
Another perspective on the four-year cycle of cryptocurrencies
This is a historic moment for the global economy: the S&P index has just experienced the worst week and the best week in succession. Typically, Bitcoin's price experiences significant fluctuations due to major macro events, which often coincide with global liquidity cycles. 2012 was the Eurozone sovereign debt crisis. 2016 was Brexit. 2020 was the economic collapse caused by the COVID-19 pandemic. Many attribute Bitcoin's price cycles to halving, but another explanation is that significant macroeconomic events occur every four years, which just happen to support Bitcoin's bull market. We are once again at such a moment.
Recent macroeconomic events are evolving into a crisis of trust in the dollar. Many point out that the rise in long-term Treasury yields signals turmoil in the bond market or capital flight triggered by foreign companies and entities divesting their savings from the dollar. The primary function of Bitcoin is that it serves as a non-sovereign store of value. This does not necessarily mean that the price must be stable, but it is seen as an attractive alternative and diversification investment tool in an increasingly uncertain world. This de-dollarization undoubtedly confirms this argument.
Early signs of relative strength in cryptocurrencies
We are starting to see signs of digital assets performing better in a short period. As of April, digital assets have outperformed stocks and the dollar. Solana and Bitcoin rose, while U.S. stocks fell. It is still too early, but just as digital assets were the first to pull back, they may also be the first to hit bottom and rebound.
Positive industry developments have been overlooked
Furthermore, we should remember that many positive industry developments have been overlooked amid price fluctuations. In terms of policy actions, this includes the White House appointing a 'crypto czar' and forming a digital asset working group, establishing strategic Bitcoin reserves, rolling back strict regulations like SAB-121 and DeFi broker rules, and the U.S. SEC dismissing dozens of lawsuits against large companies. It can be said that the crypto industry has experienced some of the most positive headlines in its history, many of which are structural changes; however, it has also experienced its worst quarter since 2018. We believe that this good news has certainly not been absorbed by the market, but has simply been overlooked amid market volatility.
Fundamentals are improving
Most importantly, digital assets need real adoption and usage to sustain. Blockchain companies are currently generating billions of dollars in revenue. Real Economic Value - a measure of total demand and value capture for L1 blockchains - was $1.5 billion last quarter, annualizing to $6 billion. During the same period, total on-chain application revenues were around $3 billion, annualizing to $10 billion. Daily active addresses (a measure of user activity) continue to hit new highs. As more people choose to use cryptocurrencies for payments and savings, the volume of stablecoin and on-chain stablecoin transfers has also reached all-time highs. In the early stages, innovations in key investment focus areas like stablecoins, AI, DePIN, and DeFi remain strong. We expect these fundamental indicators to show an upward trend as more people discover the exciting applications and opportunities offered on-chain.
Conclusion
In summary, this has been a challenging quarter, with huge macro forces clearly dominating, leading to a significant retreat in risk appetite. The biggest hidden danger remains the uncertainty surrounding tariffs and their impact on the global economy. The market outlook remains highly uncertain, which is reflected in sentiment indicators that are at historical lows. However, these sentiment signals also suggest that we may have passed the most aggressive selling point.
After we navigate this tariff-driven volatility, I believe investors will begin to appreciate all the long-term positive factors and strong fundamentals, and I still expect digital assets to perform strongly this year. As a pioneering growth asset, cryptocurrencies are the first to pull back, but they may also be the first to rebound and the fastest to recover.