“That’s Our Two Satoshis” - A Strong, Then Weak, Start for Digital Assets in 2025

Jeff Dorman, CFA
Jan 13, 2025

Thats Our 2 Satoshis Logo

Screenshot 2025-01-13 at 7.58.51 AM
Source: TradingView, CNBC, Bloomberg, Messari

 

Consensus Was Wrong For 3 Straight Years!
We are back after a three-week hiatus over the holidays.  While we took a small break, the market certainly didn’t.   Crypto experienced a brief but significant pullback following the FOMC meeting in mid-December, a sharp rally to start the year, followed by another steep pullback last week after robust U.S. jobs data. The "good news is bad news" reaction to U.S. markets is silly.  Historically, stocks fall when the Fed cuts rates because they cut for a reason (bad economy).  Pausing or ending rate cuts is actually a good thing (strong economy).  The time to panic is when the Fed starts hiking again (inflation) or aggressively cuts (recession). The chart below shows the S&P 500 against the Fed Funds rate, and it clearly shows that stocks perform poorly during rate-cutting regimes. 
 
Source: TradingView
 
Aside from economic data, some of the volatility can be explained by the time of year.  Back-to-back Wednesday market holidays to close the year significantly slowed the debt and equity markets. At the same time, digital assets remained open for business, and even the first few weeks of the year ahead of the U.S. presidential inauguration have been somewhat muted.  But unlike the equity and debt markets, where dividends and coupons still accrue during periods of slow market activity and create a natural bid to the market, the digital assets market tends to decline during periods of slower activity because there are few natural cash flows to be used for reinvestment.  
 
That said, despite the volatility and recent negative sentiment, it’s hard to be anything but bullish on the market given the incoming U.S. administration, the macro backdrop, and seasonality. The consensus expectations for all global markets over the past three years have been comically dead wrong.   And 2024 was no exception.  Take, for example, the S&P 500, which ended the year at 5,882, besting every major Wall Street firm's price target by over 400 points. The SPX actual price gain of +23% in 2024 was over 21% higher than the average forecast!  


 
In similar fashion, just about every fixed-income investor's outlook has been wrong. After underestimating the severity of rate hikes in 2022, the market overestimated rate cuts for the past two years and certainly did not expect the 10-year to rise 100 bps after the Fed finally cut front-end rates by 100 bps. 
 
Source: Zerohedge
 
Consensus expectations for digital assets are always little harder to summarize. Still, it’s safe to say that very few expected digital assets to crash as far as they did in 2022, and almost no one predicted that digital assets would be the best-performing asset class in both 2023 and 2024, with near triple-digit returns.  
 
Source:  Twitter / X
 
2025 is not off to a strong start.  Broad gains across the board led by the AI sector quickly turned to losses in week 2.  However, January has historically been very positive for digital asset sectors outside of Bitcoin, as capital flows from Bitcoin and Ethereum into smaller cap tokens in different sectors like Layer 1 protocols, DeFi, Gaming, and AI. This has been even more pronounced in years following a Bitcoin halving (2017, 2021 and perhaps 2025).  So we’ll see if the recent weakness persists as markets return to normal. 
 

Source:  Twitter / X
 
The market flush in mid-December may have duped a few crypto investors into thinking the rally is over.  But the key focus over the next few weeks will be capital flows.  BTC and ETH ETFs saw $4.6 billion and $2.1 billion, respectively, in inflows in December, while stablecoin supply (mints) were over $30 billion.  That’s a lot of new capital flowing into digital assets directly.  However, most liquid hedge funds have yet to see meaningful inflows, which was directly responsible for a big part of the growth in other sectors in 2020 and 2021.  
 

Source: Glassnode
 
 
 

And That’s Our Two Satoshis!
Thanks for reading everyone! Questions or comments, just let us know.

 
The Arca Portfolio Management Team
Jeff Dorman, CFA - Chief Investment Officer
Katie Talati - Director of Research
Sasha Fleyshman - Portfolio Manager
David Nage - Portfolio Manager
Wes Hansen - Director of Trading and Operations
Michal Benedykcinski - Senior Vice President, Research
Alex Woodard - Associate, Research
Christopher Macpherson - Research Analyst
Andrew Masotti - Associate, Trading and Operations
Joey Reinberg, Associate, Trading and Operations
 
 
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