2025 Crypto Outlook

by Ryan Shea

Introduction

• 2024 was undoubtedly a big year for crypto with the Trakx benchmark Top10 Crypto CTI rallying over 140%, which is 3X the performance of Chinese equities, the best performing tradfi asset. However, it is not just about price performance. 
• In many regards, crypto came of age last year gaining credibility with financial institutions thanks to the greenlighting of spot Bitcoin and Ethereum ETF products in the US and Asia. 
• Crypto also experienced the warm embrace of Donald Trump, the winner of November’s presidential election, setting the stage for a much more crypto-friendly environment. 
• In our view, crypto adoption will further widen in 2025, including at the nation state level. Indeed, we would not be surprised to see an outbreak of sovereign FOMO – a very bullish development as and when it occurs.
• Other trends to keep an eye on this year include the arrival of the alt-coin season –  a feature of every prior crypto bull market – and the nascent but thriving collaboration of AI and crypto projects.

If we were to sum up the past 12 months in the most concise way possible it would have to be via a meme – after all, memes and their associated tokens were the stars of last year as illustrated by the 344% surge in the value of our Meme CTI. This represents an almost 3X outperformance of the broader crypto market, which was no slouch itself, given the 130% gain in the Trakx benchmark Top10 Crypto CTI. By contrast, the best performing tradfi asset class was Chinese equities which gained 30% after President Xi’s government pumped in CNY 10 trillion of fresh stimulus. And what else would our meme pick be other than this?!

 2024 Crypto Update

Source: Lark Davis via Facebook 

Just like every other financial asset on the planet, crypto prices move in cycles and last year was a good year so as per the above meme does that imply 2025 will be a down year? At some point the crypto bull market will fade and prices will head south, but we don’t see this happening in 2025 for the reasons we will outline below. However, before getting to that, let’s take a brief look at how 2024 evolved. 

As our regular readers will know this time last year we outlined what we considered would be the three key “macro” trends impacting the crypto industry over the past 12 months. They were: the tokenization of RWA (real world assets), the ongoing search for scalability and, finally, macro itself, or to be more specific, the growing realization by the public that monetary and fiscal policies in many of the world’s leading economies are on a collusion course implying that government debt is on an unsustainable trajectory. 

So how did we do?

 2024 – A Peek In The Rear View Mirror 

Rather like Trump in November’s US presidential election it was pretty much a clean sweep. 

First, with regard to tokenization of RWA, the drive to put off-chain assets on-chain continued to record very strong growth over the past 12 months. Having started 2024 at $8.4bn the total value of on-chain real world assets rose to more than $13.4bn – a 60% annual growth rate. Within this total, the biggest bucket of tokenized assets is private credit accounting for over $9bn of the total – see image. At the risk of stating the obvious to those more familiar with crypto, these figures naturally exclude the largest single pool of tokenized real world assets, namely fiat-backed stable coins such as Tether and USDC. Including these would send the total RWA on-chain figure to more than $200bn because, in keeping with the other tokenized RWA, stable coins witnessed very robust growth last year as shown by the 50% rise in their market cap. What should be patently clear is whichever definition of tokenized RWA one chooses the growth figures are impressive, especially for a technology (blockchain) that hold-out crypto naysayers still consider to be a solution in search of a problem¹.

Total RWA On-chain (Excluding stablecoins)

Source: rwa.xyz

Turing now to scaling, as originally conceived blockchains face what has come to be known as the blockchain trilemma. In simple terms the trilemma states that of the three following desirable properties – security, decentralization and scalability – blockchains are only able to achieve any two of them simultaneously. Reflecting the anarchistic roots of cryptocurrencies, the property that typically gets sacrificed is scalability. Consequently, monolithic blockchains like Bitcoin and Ethereum cannot support high quantities of transactions (typically in the range of 7-20 tps). Such rates are well-below the standards required in the fiat world (20,000+ tps), so blockchain designers and crypto nerds have been on a quest to loosen the trilemma by overcoming the scalability problem.

Essentially there are two avenues being explored to achieve the desired goal. The first approach focuses on Layer 1 solutions, which includes increasing the size of blocks to accommodate more transactions, sharding where the blockchain effectively gets chopped into smaller pieces and transactions get conducted in parallel, or by modifying data storage / structures to reduce memory consumption. Such solutions typically require hardforks for them to be adopted and it is not always easy to gain sufficient user agreement to implement the required code changes. The now infamous blocksize wars in Bitcoin² that took place between 2015-2017 being a very apt demonstration of how torturous such processes can be.

The second, and currently more popular, approach is Layer 2 solutions where transaction recording, processing and storage occurs off-chain i.e. in another protocol, and these results get compressed and periodically sent back to Layer 1 for settlement. Via this batching process, the Layer 2 protocol is able to process much greater transaction volumes while still being able to “inherent” the security of the Layer 1 blockchain: a win-win.

Given its history as a pioneer of decentralized applications, and the fact it is the second largest cryptocurrency by market cap, the Ethereum blockchain has been one of the most visible adopters of Layer 2 scaling technology deploying Optimistic and ZK (zero knowledge) roll-ups such as Polygon, OP Mainnet, Arbitrum or Base. As can be observed from the image below, there has been a substantial uptick in Layer 2 transactions compared with ETH mainnet transactions (blue line), especially after the integration of EIP-4844 (green diamond on the chart) via the Dencun upgrade back in March. This hard fork introduced protodanksharding and led to the creation of a new transaction type on the Ethereum network based on data containers or “blobs” (Binary Large OBjects). This upgrade significantly lowered the cost of Layer 2 transactions and hence incentivized users to migrate more of their activity away from Layer 1.

Ethereum Daily Average TPS

Source: l2beat.com

Unfortunately, even though Layer 2 transactions increased sharply after the Dencun upgrade, total fees earned on the Ethereum mainnet plummeted. And, because of EIP-1559, which introduced partial fee burning (see our prior research note for the full details), this drop in fees meant Ethereum supply went from deflationary to mildly inflationary as per the chart below, which plots the total outstanding supply of ETH since the 2022 Merge. It turns out ETH was not as ultrasound money as the devs who named the monitoring website thought it would be!

Source: ultrasound.money

So, for many ETH bag holders, the implementation of Layer 2 scaling solutions has been a double-edged sword. Although they have considerably boosted transaction bandwidth (ie scaling), which is a good thing because it keeps users in the Ethereum ecosystem, it has come at the cost of a substantial reduction in mainnet transaction fees due to the parasitic nature of Layer 2 transactions, which in turn, has had a knock-on effects on ETH net supply dynamics. ETH’s inflation rate may still be comfortably below those of many other leading blockchains, including Bitcoin which many crypto players would hold up as the gold standard (pun slightly intended), but there is widespread suspicion that has been responsible for ETH’s notable price underperformance in 2024 with year-to-date returns half that of Bitcoin and Solana – the two cryptocurrencies that sandwich ETH in market cap terms.

Finally, let’s round off this top level 2024 review by examining the third key macro trend, which was macro itself. Specifically, increasing public awareness that demand-side policy stances (monetary and fiscal) in most of the major economies mean public sector debt trajectories are unsustainable.

As the chart below clearly shows, public sector debt levels in all of the major economies are at levels unprecedented for peace time. In fact, the ratios are not far off those seen during World War II in most instances. During periods of low nominal interest rates like we saw in the decade prior to the Covid pandemic, the burden of servicing such high debt loads is bearable, but we are no longer in such a benign environment. Central banks eased monetary policy last year in response to a mild disinflation trend, and this helped alleviate some of the immediate pressure, but governments still chose to run sizable structural budget deficits (Japan, France and Italy being the worst offenders); fiscal shortfalls that add to the debt mountain year-in, year-out. Failure to address the underlying problem because it is difficult to enact economically (boosting trend GDP growth) or politically (cutting spending or raising taxes) means government fiscal positions remain very precarious.

Government Debt (% nominal GDP)

Source: IMF World Economic Database (October 24 edition)

Even the IMF acknowledges as much as per this recent blog post. To wit,

“Global public debt is very high. It is expected to exceed $100 trillion, or about 93 percent of global gross domestic product by the end of this year and will approach 100 percent of GDP by 2030. This is 10 percentage points of GDP above 2019, that is, before the pandemic.”

Bad as that is, they went on to add…

“[T]he fiscal outlook of many countries might be worse than expected for three reasons: large spending pressures, optimism bias of debt projections, and sizable unidentified debt.”

These are not the words one expects to read if public sector balance sheets were in good shape. Also, it does not take an economic genius to join the dots and conclude that the end result is either a default or debt restructuring or, if such financially messy outcomes are to be avoided, central banks printing money to fund the fiscal shortfall. Getting off this path may be possible in theory, but as history shows it is very difficult in practice (large sustained fiscal consolidations are very rare occurrences). The IMF, many tradfi macro investors, crypto bros and us all recognize this problem, but so too do an increasing number of normies³ – see image.

The Light Bulb Moment

Source: imgflip.com

How do we know this? The market tells us.

Specifically, the price of Bitcoin and gold both hit fresh all-time highs last year and, as I have argued previously, these two investment vehicles are the most liquid and portable (a characteristic whose value rises the more dire the situation becomes) ways to protect against unpleasant monetary outcomes. Even BlackRock, the world’s largest tradfi asset manager, agrees as it recently described Bitcoin as a “global monetary alternative”. Obviously, as the sponsor of the largest spot Bitcoin ETF in the US, they could accused of “talking their book”, but the fact is there been huge inflows in all spot Bitcoin ETFs since their launch back in January. In fact, total AUM for spot Bitcoin ETFs in the US has risen to over $104bn, just $16bn shy the market cap of gold ETFs. The buyers of such products are not your typical crypto bros but normies, a crowd that rarely deviates much from standard 60-40 equity-bond portfolios. Something is driving this change investment behaviour, and that something is increasing concern about the health of the fiat money system.

That was last year, what about 2025?

Crystal Ball Time

The three key trends that we envisage impacting digital asset markets this year are, again in no particular order: the establishment of at least one officially-sanctioned Bitcoin strategic reserve, which should be considered part of the continued centralization trend in Bitcoin; the arrival of altcoin season (a necessary ingredient in every crypto bull market); and, finally, even greater overlap between AI and crypto.

Strategic Crypto Reserves

Given it featured in Trump’s re-election bid, predicting there will be at least one officially-sanctioned strategic Bitcoin reserve established during 2025 seems like low hanging fruit, and in a sense it is. Failure by the Trump administration to deliver on this promise would be very damaging politically after the strong overtures made to the crypto community during the campaign and, given Republicans control both Houses meaning they are well-positioned to pass the necessary legislation, it is an outcome that can be easily avoided.

Part of the reason why we hold such a strong conviction the US will establish such an entity is, as I have noted in previous research notes, Bitcoin is ideally suited to act as a reserve asset in a world where there is declining international trust, something we think most would concur is a fair description of the current geopolitical landscape.

Moreover, as the Bitcoin Policy Institute – correctly in our view – argued in a recent policy briefing the creation of a strategic Bitcoin reserve would serve to reinforce American monetary dominance, as well as maintain its global technological and economic leadership by becoming the first major government (apologies to El Salvador and Bhutan) to embrace cryptocurrencies. It would also help provide a financial anchor for the world’s largest economy.

For believers of the hi-tech Ponzi scheme narrative, the notion of Bitcoin being useful to a nation-state in such ways probably seems ludicrous, but is it really?

According to the IMF, 15% of the reserve assets held by nation-states around the world is in the form of gold bullion. This 29,000 tonne stash of yellow metal, which has been extracted out of the ground, refined and then “reburied” in central bank vaults⁴ is no longer needed to support an international gold standard because that monetary framework was abandoned over fifty years ago. Neither can it be used to support or settle every day financial transactions carried out by the public, the vast majority of which are done electronically via the commercial banking system. Nor is gold’s intrinsic worth much to write home about given demand for its ability to conduct an electronic current efficiently accounts for less than 10% of overall demand⁵.

So why do official institutions hold so much gold? According to one fiat apologist at the Cato Institute, the primary reason is, and we quote, “sheer inertia” (their emphasis!). Yes you heard that right, central banks hold over $2.2tr in gold bullion because they are… well… er, set in their ways. We know, don’t laugh, the author probably believes what they are writing even though inertia hardly explains why central bank purchases of gold have surged in the last few years.

We, and others in the crypto world, think there are better explanations than simple institutional laziness. Maybe, just maybe, after the Biden administration decided to weaponize the US dollar by freezing Russian central bank reserves following their invasion of Ukraine, other nation states decided that gold was worth owning because when custodied within one’s borders ownership cannot be banned. Alternatively, perhaps after the inflation surge induced by central banks firing up the printing presses as part of the global response to the Covid Pandemic, these same institutions perceive gold to be valuable because its supply cannot be easily altered. Of course, it could be a combination of two that encouraged nation states not only to hold on to their existing gold reserves but to aggressively add to them.

Gold’s ability to maintain its purchasing power (ie to act as a financial anchor) irrespective of the actions of other nation-states is what encourages nation states to continue to own what Keynes dismissively labeled the barbarous relic a century ago. And, by deliberate design, Bitcoin replicates these same important features.

Taking all of this into consideration, in our judgment the only area of uncertainty in relation to the US establishing a strategic Bitcoin reserve is one of timing because, as orange-pilled as he may be, once he gets back to the Oval Office Trump has many more pressing matters to deal with first, such as ending the Russia/Ukraine war and seeing peace return to the Middle East.

Sovereign FOMO

While all eyes are naturally drawn to the US after Trump’s pre-election promise, personally we would not be too surprised if other nation states were to beat the US in establishing a Bitcoin reserve. Speculation has recently been directed towards the gulf petro states and for good reason. Not only do they have large portfolios of foreign tradfi assets whose returns could be enhanced via a crypto allocation, but these nation states have feet in two political camps: the west and the rest. Choosing to invest in a “neutral” reserve asset like Bitcoin is therefore a good way for them to stay on everyone’s good side. Other possibilities include Brazil and Poland given politicians in both countries have also recently backed the creation of such a reserve.

When considering this topic at the global level one soon realizes that some interesting game theory comes into play. Relative to gold, Bitcoin is seriously undervalued with a market cap only a tenth that of the yellow metal. This strongly suggests that if (when?) nation states recognize the merits of holding Bitcoin as well as gold in their reserves and they begin buying, the price of Bitcoin is likely to move explosively to the upside in anticipation of other nation states following suit⁶. Hence, there is a strong financial incentive to be a first-mover when setting up an official Bitcoin reserve because the laggards could very well find themselves scrambling to play catch-up and having to buy Bitcoin at much higher prices. In our view, nation-state FOMO could very well feature in the 2025 crypto landscape.

The Central(ization) Tendency

For many Bitcoin bulls, nation state adoption sounds great because it implies more number go up. However, for non-financially-motivated crypto anarchists it constitutes a very unwelcome development as it means their dream of a decentralized, incorruptible, private money taking over the world cannot be realized. Unfortunately for this group, that dream was always undeliverable, at least in its purest form, because the ossification of the Bitcoin code⁷ necessarily implies increased centralization if Bitcoin is to thrive, irrespective of whether governments get involved or not.

To understand why, consider the situation where crypto jumps what PR people call The Chasm on its way to mass adoption. Under such circumstances, it is not unreasonable to expect the global tally of Bitcoin owners to be in the 100 millions or even billions. Recall that due to the block size constraint (4MB) the number of Bitcoin transactions per day is limited. The peak number of transactions ever recorded on the Bitcoin blockchain occurred in December 2023 when the network processed over 724,000 – a number not too far off its theoretical max. Assuming 1 billion Bitcoin owners, at this bandwidth the Bitcoin network can only support one transaction per person every 3.4 years.

[1,000,000,000 Bitcoin Owners/800,000 Transactions per second = 1,250 days or 3.4 years]

This is hardly suitable for the needs of a modern economy.

The limited transaction capability of the Bitcoin network also means that transaction fees will have to rise to around $50-70. This is because in order to set a fixed 21 million supply cap, Bitcoin issuance gradually tapers away to nothing. The last Bitcoin (or satoshi to be more accurate) will not be mined for another hundred years, but the declining block subsidy will see Bitcoin miners having to rely almost exclusively on transaction fees to fund the hash power necessary to secure the network much sooner than this – probably in the next decade or so⁸. Obviously, such transaction fees far exceed levels that the vast majority of financial transactions can bear, but it is in the ballpark when it comes to high-value cross border transactions currently carried out by large financial institutions.

The unavoidable implication is that as things currently stand there is no way that Bitcoin can natively support mass adoption. Either the 21 million supply constraint needs to be loosened, say to allow for the introduction of tail emissions (an issuance model adopted by the privacy token, Monero) but this is sacrilegious to most Bitcoiners, or centralization must increase.

Nation-state adoption, as outlined above, is one way this centralization could occur but it is not the only possibility. Centralization is just as likely via the private sector, with large pools of Bitcoin effectively becoming proto-Bitcoin banks. Indeed, one could argue that this will be the end destination for the substantial Bitcoin bags being built up by BlackRock and Michael Saylor’s Microstrategy.

Bitcoin banks could, for example, make high numbers of off-chain bilateral payments in support of their clients’ transactions over the Layer 2 Lightning Network and then periodically settle any net outstanding balances between each other on-chain. By batching off-chain transactions in this way the high transaction fees required to fund the hash power that ensure the security of the Bitcoin blockchain can be spread over hundreds or thousands of transactions making them economically viable.

In many ways this set-up is similar to the way the fiat banking system functions, but with one critically important difference. In the fiat world, settlement occurs via the central bank who is also the sole issuer of money. Bitcoin, in contrast, has no need for such an institution because issuance and settlement are all taken care of via the Bitcoin code base. Anyone familiar with the writings of Satoshi knows that having a centralizer issuer was the fundamental problem they had with the fiat money system and their primary motivation for creating Bitcoin. To wit,

“The central bank must be trusted not to debase the currency, but the history of fiat currencies is full of breaches of that trust.”

Under a Bitcoin bank model suggested above, this fundamental flaw with fiat money is still overcome because none of these banks are able to “print” additional Bitcoin. Yes, there is a cost in the form of increased centralization but this is the price that must be paid for scalability as per the trilemma mentioned earlier. Such a system may be a complete anathema to crypto anarchists but for more mainstream crypto users and normies is it really so terrible? Indeed, relative to the incumbent fiat money system it represents an improvement because it means that the government doesn’t have the means to devalue the value of their money. Given this, and the rather obvious incentives for companies like BlackRock and Microstrategy to transition to such a model (the alternative being Bitcoin withers away to nothing and their crypto bags become worthless) we expect this will be the path that Bitcoin follows in 2025.

Alt-coin Season

Of course, for those opposed to such a future, there is naturally nothing to stop them migrating to other cryptocurrencies. Ethereum, as the next largest token by market cap, is an obvious choice. So too is Solana, a token whose design means higher Layer 1 transaction bandwidth, and which could be next in line for ETF approval by the SEC following the imminent exit of Gary Gensler.

There again, maybe 2025 will be another “Year of Memes” with crypto degens choosing to encourage Musk in his bid to streamline the US government in his new role as co-Head of the Department of Government Efficiency by continuing to ramp up the price of DOGE. Either way, we see 2025 as the year the altcoin season finally kicks off, something that has been a feature of every prior crypto bull market, but which has been distinctly lacking so far as evidenced by the rise in Bitcoin dominance (defined as Bitcoin’s share of the total crypto market cap – see chart) during last year’s rally.

Bitcoin Dominance vs. Price

Source: TradingView

Artificial Intelligence

The final key trend is the increasing overlap between crypto and AI. We got a recent taste of this just a few weeks ago with the surge in the value of VIRTUAL – the native token of Virtuals Protocol, a launchpad and market place for AI agents that allows all users, regardless of technical ability, to create and monetize agents for virtual interactions. By connecting AI software with blockchain the agents are able to interact and make decisions autonomously, including making on chain transactions. We are currently in the early stages of this trend, but as crypto rails are a rather obvious choice for an AI agent, we expect to see it flourish over the next 12 months. In what exact direction this will be is hard to know with any certainty. But, as a little teaser, let us just say we can’t be the only ones thinking that hashing calculations and AI inference are rather similar processes (flashing GPUs consuming electricity 😉⁹). However, rather than listen to us perhaps the better approach is to ask your AI Agent.

Cue the final MEME.

Source: X (via @hchaballout)

1 If there are any crypto naysayers reading this post may we direct you to the following post on the London School of Economics (LSE) website by Kobe De Keere, an Assistant Professor of Sociology at the University of Amsterdam and visiting fellow at the LSE. In it he outlines what he found when entering the crypto rabbit hold for the first time and the results may be somewhat surprising – see: https://blogs.lse.ac.uk/researchingsociology/2024/11/21/a-sociological-venture-into-the-world-of-cryptocurrencies/

2 For a great in-depth read of the Bitcoin blocksize wars we recommend the following book – see: https://www.amazon.co.uk/Blocksize-War-controls-Bitcoins-protocol/dp/B08YQMC2WM

3 There is a very important caveat to add to this argument and that relates to the US, specifically how successful the Musk-led Department of Government Efficiency established by the new Trump administration will be. We outlined our preliminary thoughts on this subject in the last Trakx Crypto monthly update, so rather than repeat ourselves we would direct readers there instead – see: https://trakx.io/resources/insights/crypto-thanksgiving/

4 At great cost we might add!

5 See: https://trakx.io/resources/research/interest-ing-times-part-i/

6 There is a strong network effect at play here because reserves are only useful if they are widely accepted by other nation states.

7 Especially the small block size to limit the growth of the Bitcoin blockchain making it less onerous to run a full node in support of decentralization.

8 The exact timing will depend upon the price of Bitcoin relative to the cost of electricity. The higher the gap the longer it will be before transaction fees need to rise.

9 If you see where we are coming from on this please get in touch we have an interesting proposal to discuss.