Following the U.S. presidential election, crypto’s headwinds have seemingly dissipated. Since early November bitcoin has reached $100K amid regulatory wins such as the nomination of crypto-friendly Paul Atkins to replace Gary Gensler as SEC chair, the naming of crypto advocate David Sacks as the incoming White House “AI and Crypto Czar,” and Congressman French Hill’s appointment to head the House Financial Services Committee. With election season coming to a crypto-favorable close in 2024, some are forecasting “altcoin” season, a period of outperformance for non-BTC crypto assets, to continue in 2025 — but is this the right way to characterize digital assets broadly?
Market commentators sometimes hastily sort the crypto economy into two oversimplified groups: 1) bitcoin (and now for some, ether) and 2) alternative or “alt” coins. In the early innings of digital assets, this dual categorization made sense as bitcoin was pioneering the use of blockchain technology and other use cases were still finding their footing. Nearly 16 years since bitcoin’s inception, an explosion of crypto innovation and sector-specific applications has pushed blockchain assets beyond the binary classification of bitcoin and “everything else.” Investors must now treat crypto as a diverse multi-sector asset class.
Putting the constituents of the digital asset class in perspective
The “altcoin” moniker may give the impression that digital assets other than bitcoin lack in size and industry-specific purpose compared to components of other asset classes such as equity markets. Figure 1 below compares the market caps of similarly sized constituents of the S&P500 Index to those of prominent crypto assets ex-BTC, and shows similarities between these asset classes not only in terms of component size, but also in terms of sector diversification:
Figure 1: Market Caps of Top 25 (ex-BTC) Crypto Assets vs. S&P 500 Constituents Smaller than ETH
Not only do the stocks of certain well-known companies highlighted above resemble the top 25 crypto assets in size (ex: Solana has a market cap similar to that of UPS), but both asset classes also span a variety of industries within their respective markets. While the number of digital assets shown above is relatively sparse compared to the number of stocks, these crypto assets alongside the market’s new and innovative crypto projects are likely to continue expanding the size and breadth of the asset class even further over time.
Constructing diversified digital asset portfolios for the long-run
Taking a binary “bitcoin vs. alts” approach to digital asset investing may forgo portfolio construction benefits both within crypto investments and across your overall asset allocation. Obtaining thoughtfully constructed, diversified, and intentional exposure to all crypto sectors and use cases helps defray the risks of asset concentration, ensures your portfolio is exposed to the full value proposition of the asset class, and provides a larger number of return sources within your broader asset allocation. Given the fast-changing, innovative nature of the digital asset landscape, it is crucial to construct crypto allocations that can adapt alongside the breadth of the asset class. This can be accomplished by adopting a process to choose the universe of assets to include in your portfolio, adjusting this universe over time, and allocating sensibly to these assets via either passive or active management. Embracing the broader crypto economy as an asset class within your investment portfolio means allocating to digital assets via strategies that are built for the long-term.
Conclusions for an evolving asset class
Focusing on bitcoin vs. “everything else” may obscure the already meaningful and fast-growing footprint of many crypto assets and could cause investors to miss out on longer-term portfolio benefits associated with comprehensive investment within the asset class.
No one can argue with 2024 being a breakthrough year for crypto. BTC and ETH ETFs launched, BlackRock spearheaded bitcoin adoption, a pro-crypto president was elected and BTC broke the 15-year all-time-high, to name a few. But the inflection point for crypto still awaits. Here are three predictions for 2025 that can help spark it:
DeFi is about to skyrocket
DeFi is becoming more complex, much like traditional finance, in terms of its product suite. We’ve already seen this trend emerging with the adoption of products like Pendle, Ethena, EtherFi and Lombard. In 2025, DeFi usage will explode, with a wave of adoption for products such as options, swaps, and other derivatives like the interest rate swap market — the latter’s market size is at 465.9 trillion USD in TradFi.
Moreover, new institutional players are entering the crypto ecosystem, nurturing a new category: On-chain finance. Participation is no longer limited to buying blue-chip cryptocurrencies like BTC and ETH. These market participants also actively expand on-chain market depth by using tools such as lending markets and liquidity provision with RWA-backed digital assets, i.e. stablecoins. Securitize and BlackRock are great examples of companies pushing the frontier on this front.
Stablecoins will continue to grow as the crypto killer use case
Stablecoins aren’t just another crypto product; they’re poised to become the digital backbone of the global financial system. Tether is the most profitable crypto company with a $5.2 billion profit in H1 2024, surpassing BlackRock.
The political landscape is shifting dramatically in favour of stablecoins, with Operation Choke Point 2.0 coming to an end. They are finally being viewed as a national asset that can strengthen the dominance of the U.S. dollar and address growing public debt. This shift also paves the way for major banks and payment companies like Visa and Mastercard to expand their efforts in the sector, especially when you consider Stripe’s acquisition of stablecoin platform Bridge for $1.1 billion (the biggest acquisition in crypto ever) and rumors of Revolut launching its stablecoin.
The race for retail adoption
ETFs will be key drivers for new capital to enter crypto. BTC ETFs are here, and soon we’ll see the success of Ethereum ETFs. After SOL’s undeniable growth over the last year, the SOL ETF will either catch the momentum and become a reality in the first half of 2025 or will delay until 2026 or later.
We’ll also see major Web3 social platforms compete with the LensChain mainnet launch and Farcaster’s further expansion. As the pie grows bigger, we can end up with the “Twitter/X and Facebook of crypto” platforms.
Notably, “Super Wallets” took off in Q4 2024. They aim to offer a comprehensive alternative to centralized exchanges for new users. The leading players are Infinex, launched by Kain Warwick, and DeFiApp, launched by seasoned builders in DeFi. Both are working on UX problems, something we have never done very well as an industry. Bonus prediction: MiCA will power crypto expansion in Europe
Crypto regulations provide the foundations for new projects. They lay the groundwork for clear rules and guidelines of organizational structure. MiCA (Markets in Crypto-Assets Regulation) attempts to bring just that with an aim to increase the importance of EUR-related assets. This could potentially bridge crypto innovation between the U.S. and Europe.
