Analysis of the driving factors of the recent weakness in the crypto market and the latest judgment on the cycle stage

summary:

• Crypto markets are being weighed down by a combination of macroeconomic headwinds and industry-specific challenges, with volatility once again on the rise.

• Bitcoin remains largely uncorrelated with traditional assets like gold and the S&P 500, highlighting its unique positioning in the current macro environment.

• Bitcoin’s dominance continues to rise, reinforcing a market structure driven by institutional capital while retail participation remains low.

• Market conditions remain uncertain, but improving macro dynamics, regulatory clarity, and changes in capital flows could lay a solid foundation for long-term market growth.

1. Introduction

Hit by waves of volatility and uncertainty, digital asset markets have been caught in the crossfire of macroeconomic pressures and crypto-specific factors. Just a few weeks ago, BTC was consolidating around $100,000, with market participants optimistic about a new round of growth under more supportive governments and structural catalysts. Today, with BTC hovering around $80,000, the market sentiment has clearly shifted. Speculation has cooled, the Bybit hack has heightened unease, and economic uncertainty has weakened risk appetite. However, there are still positive developments, such as the establishment of the US Strategic Bitcoin Reserve and a constructive shift in the way the crypto industry is regulated.

In this article, we assess the drivers behind recent crypto market weakness and where we are in the broader market cycle, looking at both macroeconomic and crypto-specific factors that will shape the path forward.

2. Macroeconomic factors dominate

Both the broader stock market and crypto assets have experienced a turbulent few months, undoing their post-election gains. The main driver of this volatility has been growing macroeconomic pressures in the form of Trump’s aggressive trade policies, retaliatory measures by major U.S. trading partners, and escalating geopolitical tensions— all of which have combined to create an environment of uncertainty that has depressed inflation expectations and economic growth.

Despite seemingly positive developments, such as the establishment of a strategic Bitcoin reserve ahead of the first White House crypto summit, the SEC’s dismissal of a high-profile lawsuit, and growing institutional momentum, macroeconomic headwinds and recent industry-specific challenges have continued to weigh on digital asset markets.

In the current uncertain market environment, gold has surged above $3,000 as investors flock to this premier safe-haven asset. Meanwhile, the S&P 500 and Nasdaq Composite are down 3.8% and 8.2% year-to-date, respectively, as risk appetite weakens. However, Bitcoin seems to be caught between these two forces. Despite being often viewed as "digital gold" and a hedge against inflation or market instability, BTC has yet to establish a meaningful correlation with gold, and its 90-day correlation with the S&P 500 and gold remains weak (around 0), pointing to its irrelevance and ambiguous role in the current market mechanism.

3. Internal factors of the crypto market

(1) Are retail investors still around?

While larger macro forces play a major role, the inherent dynamics of crypto assets continue to shape the market in unique ways. Bitcoin ( BTC ) remains the primary market driver and a barometer of the market's overall risk appetite. Bitcoin's dominance, a measure of its market capitalization as a percentage of the entire crypto market, has steadily climbed from 37% in November 2022 to 61% today. While this has been a feature of past cycles, structural shifts such as the launch of spot Bitcoin ETFs and demand from corporate holders such as MicroStrategy have amplified this Bitcoin-driven market structure.

Altcoin dominance has trended towards 39%. While the decline in Bitcoin dominance has long signaled a rotation into altcoins, marking the start of an “altcoin season,” a reversal in the current trend remains elusive. The continued weakness in altcoins may reflect a growing divergence between institutional and retail sentiment, which is also evident in spot volumes. While altcoins in general have struggled to keep pace, meme coins have become the preferred vehicle for retail speculation. However, the recent cooling in the space has further dampened retail sentiment.

(2) ETH’s poor performance and the divergence of altcoins

Another influencing factor is the continued underperformance of Ethereum (ETH) relative to Bitcoin (BTC). Changes in ETH/BTC have historically been correlated with changes in altcoin dominance, with altcoin dominance rising when ETH/BTC weakness reversed in 2017, 2018, and 2021. The current ETH/BTC ratio is 0.022, which is at a level last seen in May 2020.

While this underperformance can be attributed to Ethereum’s own challenges, such as reduced L1 activity, value accumulation in L2, and competition from other L1s, it has also weighed on broad altcoin sentiment. The ETH/BTC reversal, coupled with an improving macro outlook and regulatory clarity, could be a potential catalyst for altcoins, especially those with stronger fundamentals and clearer investment thesis in structural growth areas.

3. Volatility rises, leverage resets

BTC is volatile. Although BTC's volatility has decreased over time, it is still prone to large drops and price swings. Recently, we can see that daily volatility is rising, with BTC's 7-day realized volatility reaching 0.9 during a drop of about 25%.

This volatility has recently triggered a wave of liquidations in both spot and derivatives markets. However, the Bitcoin futures market indicates healthier positioning than it was a few months ago. Futures open interest has fallen to pre-November election levels, suggesting excess leverage has been cleared. Futures open interest has also fallen relative to its market capitalization, suggesting speculative positioning has reset. This provides a more stable foundation for the next phase of growth .

4. Where are we in the cycle? What’s next?

Given the current environment, where are we relative to previous "cycles"? Among many indicators, Bitcoin's MVRV ratio (which measures the ratio of Bitcoin's market value to its realized value - the sum of the last coin transfer price on the chain) can be a useful indicator of cycle positioning. Historically, high ratios (>3.5) indicate overheated markets, while low ratios (1) indicate attractive accumulation zones.

Currently, Bitcoin's MVRV ratio is 1.9, having peaked at nearly 2.65 earlier this year. This places its current position above the bear market lows, but below past cycle peaks, suggesting we are in a mid-term reset phase . While historical trends provide a useful framework, structural shifts such as ETF-driven demand, evolving investor profiles, and regulatory clarity could reshape how this cycle plays out and how we understand it relative to past cycles.

Looking ahead, the medium- to long-term outlook remains positive . Expectations of a highly supportive government and SEC are being fulfilled. Regulatory clarity in areas such as custody and bank participation, stablecoins, and tokenization of real-world assets (RWAs) could unleash a wave of mass adoption.

While the macroeconomic outlook remains uncertain, the foundation has been laid, and interest rate cuts and the start of a new round of liquidity may help drive the next phase of market growth as structural shifts take effect.