Source: TradingView, CNBC, Bloomberg, Messari
The U.S. Government Bailed Out Crypto
Equities were mostly unscathed in February even as crypto faltered, but last week, stocks sold off and bonds rallied further amidst weak housing data, mixed jobless claims, growth concerns, trade uncertainty, and declining consumer confidence. And while digital assets have largely been moving to the beat of its own drum this year, perhaps even front-running this sentiment shift in equities, there was no doubt crypto would decline further once other risk-assets joined the bearish sentiment brigade.
The digital assets market was again heading towards a large weekly drawdown, the 4th in the past 5 weeks, with no real support in sight. Bitcoin fell from a high of $96k to a low of $78k, finally catching up to the weakness in other sectors of the crypto market. The fear and greed index hit a 3-year low, indicating sentiment is as bad today as it was when every major counterparty and exchange was failing back in 2Q-3Q 2022.
I can’t recall another time where bad sentiment has led to price declines, which eventually led to actual fundamental declines (volumes/transactions/revenues lower). Historically, fundamentals lead price action, which leads to sentiment changes, or, sentiment diverges from fundamentals and creates a false indicator (similar to the fake selloff in
May/Jun '21). The best explanation, in my opinion, for the digital assets weakness is “the emperor has no clothes”. Meaning Solana (SOL), the market darling of the past few years and one of (if not the most) crowded long trades in crypto, was revealed to be dominated by memecoins and crime. And while this was well known, the market has always looked forward towards future, more relevant use cases, but is now only looking at the present.
And just when it looked like it couldn’t get any worse, President Trump executed the first ever crypto market bailout.
Source: Truth Social
Ok. That’s a bit tongue-in-cheek. But that’s exactly what it felt like on Sunday morning following the announcement from President Trump regarding a U.S. crypto reserve. The mechanism is, of course, different from previous government bailouts in 2008, 2020, and again in March 2023. Further, this is just an announcement, not a detailed plan, so you could argue it's just more lip service. Maybe this is more analogous to former ECB President Mario Draghi in 2012 giving his famous “
Whatever it takes” speech, which supported prices by simply promising action even though nothing really happened.
Regardless, the announcement immediately caused a +10-40% jump in digital asset prices, showing both how oversold the market was, and how much it needed news about actual buying and not just future adoption.
It’s important to remember that the bailouts in '08, ‘20 and ‘23, and the ECB speech in 2012, restored confidence and put a floor under the equity and bond markets. Some call this moral hazard or the “Fed put”. Many (including myself) prefer free markets to government interference. But there’s no question that a big part of the 16-year equity and bond bull market has been driven by high confidence that there would never be a meaningful downside.
Digital assets have never had a backstop. That’s a big reason for the persistent high volatility of this asset class. Crypto has never had a "buyer of last resort" – no government intervention, no rotation from value investors. But it’s possible that it now has this backstop, or will, in short order, and market participants have to start pricing this in.
Now, we can argue for days about what assets should be included in a “crypto strategic reserve”. Clearly, BTC is viewed as digital gold, and central banks have stockpiled gold for centuries, so that may make the most logical sense. Most (including myself) think Cardano (ADA) and Ripple (XRP) are not the same caliber as, say Ethereum (ETH) or Solana (SOL) when it comes to key metrics:
Source:
But there is another wrinkle here. Stockpiling a lot of different smart contract protocol assets like ADA, ETH and SOL is a lot different than buying tech stocks. Tech stocks can't be utilized. Buying those would be pure financial investments by the U.S. government.
Digital assets, on the other hand, have always been at the intersection of investment and payments. These innovative contract platforms derive value from finance (cash flows), utility (spending gas, collateral), and social value. If the world is going to run on blockchain one day, the U.S. government will of course be one of the biggest users, and would require the most tokens for paying gas, collateral and other use-cases. So perhaps just ending this foolish Layer-1 blockchain race right in its tracks by just anointing a few winners, and loading up on those tokens, could end up being strategic after all.
Notes from ETH Denver
Written by Michal Benedykcinski - Senior Vice President, Research
Despite recent price action and volatility leading up to the industry’s biggest gathering in the Western Hemisphere, the enthusiasm for the space, judging by strong turnout, has not waned. The latest edition was just shy of last year's record with 18,000 attendees visiting the official event and thousands more congregating at hundreds of side events sprinkled all over the Mile High City. The conference has become a good bellwether for the key themes, so we sent our portfolio team to help make sense of what they saw on the ground. The following takeaways revolve around some of the inherent dualities our industry is currently grappling with:
Regens vs. Degens
The organizers aptly chose the tagline for the 2025 edition to be “the year of Regenerates”. The meme coin mania of months prior unleashed a level of speculation our space has not seen since the NFT craze of 2021. While it brought many new users on-chain, it also led to the rise of a new villain - degenerate gambler, or ‘degen’ for short. The regenerates are meant to represent the direct opposite – builders, creators, and end users who want to make a difference in their respective communities with real products running on crypto rails. The two camps co-existed for quite some time, but only in recent months with the exposure of the memecoin cottage industry and some of their extractive practices, the degens became the industry’s scapegoats and enablers. There was a lot of soul-searching in the conversations we had with founders, some outright admitted that while speculation was one of the early product-market-fits for crypto, they did not want it to be its end goal. Most agreed, however, that while degens might seem like harbingers of chaos to most outsiders, they are often some of the power users driving the early stage of growth so critical to many young web3 projects. Some of the most vocal builders who spoke to us on the topic were the teams behind popular web3 AI agents platforms who emphasized the need for building human-centric AI that will make our lives easier/ more productive. For a sneak peek of the possible future, we tested a few robots plugged into crypto networks that made a debut this year, where you could get your portrait sketched & minted on-chain or take a robot for a walk that was running off on-chain geopositioning data.
ETH vs. L2s
ETH Denver organizers have faced a lot of criticism for opening up the event to other non-EVM projects (i.e. Solana). Criticism was deflected by the initial promise of interoperability where liquidity could seamlessly flow between ecosystems and grow the overall pie. More recently, however, there has been a debate about whether all projects and ETH Denver sponsorship dollars are Ethereum-aligned. Ever since Ethereum went on the path of prioritizing the roll-up strategy as championed by Vitalik himself, there have been doubts creeping into the community on whether Ethereum has given up the lion's share of its fee economics to the roll-ups. With the recent trend of popular applications like Uniswap launching their chains, the concerns about further fragmentation of fees are mounting. Most of the EVM roll-ups argue that by bringing real GDP on-chain, in the long run, they should benefit Ethereum but skeptics see a fundamental incentive misalignment and point to app chain experiments in Cosmos that never transferred any value back to ATOM, the ecosystem token.
Liquid vs Private Investing
Talking to fellow investors, we picked up on a noticeable slow-down in VC deployments this quarter. Many of the 2021 vintage funds are nearing the end of their investment cycle and are increasingly more selective with allocating whatever funds remain. As funds are only starting to hit the fundraising trail this quarter, we are likely to experience a temporary supply shock of venture dollars available. Outside of regulatory changes and the pro-crypto stance that came with the new US administration, the lag in new funds coming to the market contributed heavily to the proliferation of new token launches. The token generation events became a new way for projects to boost their treasuries and secure their runway in a tight private capital environment. To support this trend, we can compare the private market rounds announced since the start of the year, hovering around $2.6bn to about the same raised by just 4 recent token launches from Berachain, Story, Movement & Kaito (source: Messari & Coingecko). Most of the crypto venture funds we spoke to started looking for more liquid investment opportunities unencumbered by lock-ups or long vesting schedules.
The most fascinating segment widely discussed at ETH Denver was the emergence of the next-generation crowdfunding platforms like Legion or Echo that are trying to democratize access to early investment rounds while also bootstrapping the early community for projects launching there. There was a noticeable fatigue with recent project launches that had heavy VC backing, but some pointed to a premium ascribed to those tokens as a quality filter from outright scams. In the coming months, we will see if the next-generation ICO launchpad platforms are going to turn the tables on private markets, which have been historically dominated by VCs.
New vs Old Guard
It was refreshing to see so many new faces entering this space over the past year. We spoke to fresh graduates coding alongside web2 veterans across several ecosystem hacker houses and participated in a few product demos. We came away particularly impressed by the consumer application focus, which was most notable at the BASE house. While everyone continues to lament the oversupply of blockspace to carry the transactional loads, the need for applications with a mass audience appeal couldn’t be more pressing. We’ve also seen a lot of excitement and experimentation at the nexus of stablecoins and decentralized physical infrastructure (DePIN). Imagine incentivizing new solar farm installs by tokenizing the carbon credits they generate, allowing them to monetize the positive externality, all verified and settled on the blockchain. Some of the old guards at fintech and major banks were back at the conference, signalling a turning of a new page in a tumultuous relationship. There appears to be a number of institutional products in stealth around payment & settlement, confirming our hunch that stablecoins are the apex predator of our industry.
Overall, while some investors were less optimistic this year, pointing to a lack of fundamentals behind the up-only market, the builders we spoke with remained unperturbed. While it might seem like they are historically playing catch-up, some of the lowest sentiment periods were most productive for the builders who are here to play the long game. The push and pull between seemingly opposing forces lies at the core of what brings everything into existence in crypto and was on a full display in Denver last week.
