Grayscale: What factors caused the crypto market to fall in February? Will it continue to weaken in the future?
summary
The cryptocurrency market in February 2025 presents a stark contrast, with declining valuations but mostly positive fundamental news. Despite short-term setbacks, improving fundamentals should provide a solid foundation for technological development and user adoption. Our market-cap-weighted crypto sector price index fell 22% in February 2025. On a risk-adjusted basis (i.e., taking into account the volatility of each asset), the crypto market’s performance for the month was comparable to the declines in cyclical and technology-oriented equity market sectors (Exhibit 1). Bitcoin performed slightly better than the overall crypto market, falling 18% , although its risk-adjusted return was lower than that of the overall crypto market (reflecting Bitcoin’s typically lower volatility). Non-U.S. equity markets outperformed as concerns about the outlook for U.S. economic growth led to lower U.S. Treasury yields and strong bond price returns. Figure 1: Cryptocurrency valuations fall as tech stocks fall Following the Trump administration’s executive order on cryptocurrencies in January, the U.S. Securities and Exchange Commission (SEC), under Acting Chairman Uyeda, has begun shifting its regulatory approach to the industry. First, the agency terminated or suspended investigations into several cryptocurrency firms, including Coinbase, Binance, OpenSea, Uniswap, Consensys, and Robinhood. Second, the SEC dropped its appeal of a controversial “dealer rule” lawsuit. If implemented, the rule would have subject various decentralized finance (DeFi) protocols to traditional securities regulation. Third, the agency announced the creation of a Cyber and Emerging Technologies Division to replace its existing Crypto Assets and Networks Division. Meanwhile, a bipartisan group of senators introduced the Guiding and Establishing National Innovation for US Stablecoins Act (GENIUS Act). This legislation builds on the efforts of the previous Congress and aims to provide a comprehensive regulatory framework for the issuance of US payment stablecoins. Its key provisions include defining the concept of "permitted payment stablecoin issuers" and stipulating that stablecoins must be backed by US Treasury bonds, insured deposits, or closely related financial instruments at a ratio of at least 1:1. According to Allium, stablecoins currently process more than 100 million transactions per month, with a total transaction value of approximately $600 billion (see Chart 2; the data has been adjusted to exclude high-frequency trading and robot trading). Figure 2: Growth in stablecoin transactions Improving market structure for cryptocurrencies may be driving greater participation from institutional investors. Hundreds of institutional investors have already dabbled in cryptocurrencies through stakes in venture capital and hedge funds. For example, the recently released Q4 13F filing shows that Mubadala Investment Company, the sovereign wealth fund of the Abu Dhabi government, has invested in a U.S.-listed Bitcoin exchange-traded fund (ETP). Similarly, the Financial Times reported in February that some foundations and university endowments in the U.S. have begun investing in Bitcoin or are considering allocating funds to the crypto asset class. In our view, cryptocurrencies have the potential to be a suitable investment allocation option for investors such as sovereign wealth funds and endowments that manage diversified portfolios and have a longer investment horizon. While the cryptocurrency industry is benefiting from increasing regulatory clarity and institutional acceptance, the sector has also suffered some setbacks recently. Most notably, on February 21, ByBit, the second-largest exchange in the cryptocurrency space by volume, lost approximately $1.5 billion in Ethereum and similar assets in a hack believed to have been carried out by North Korea’s “Lazarus Group.” The hack was the largest in cryptocurrency history in terms of total funds lost, highlighting the need for continued cybersecurity efforts. At the same time, no user funds were lost in the incident, and observers generally praised the exchange’s crisis response efforts. By the end of February, ByBit’s spot trading volumes had largely returned to normal. While cybercrime in the cryptocurrency space remains a significant issue, the dollar value lost in hacks has declined over time relative to the size of the cryptocurrency market. On the other hand, the thriving Solana ecosystem has recently cooled somewhat due to a cooling of Meme coin activity . Prior to last month, Meme coin activity brought a large amount of transaction volume and fee income to the Solana blockchain, and even attracted participation from President Trump and the First Lady. However, the launch of a Meme coin associated with Argentine President Javier Milei and related revelations about the misconduct of certain Meme coin promoters seem to have triggered a shift in market sentiment. Since then, valuations of popular meme coins have fallen by 15% to 35%, and trading volumes on leading Solana decentralized exchanges (DEXs) such as Raydium have also declined (see Figure 3). Meme coins can be considered digital collectibles, and we believe they are likely to remain a fixture of the cryptocurrency market. However, the recent surge in Solana’s extremely high new issuance and trading volume of meme coins may have ended. Nonetheless, Solana remains a leading blockchain in other key areas, including the decentralized physical infrastructure (DePIN) project. And in our view, the decline in meme coin trading activity does not fundamentally affect the long-term investment logic of the blockchain’s native token SOL. Figure 3: Memecoin transactions on Solana have slowed down We expect the cryptocurrency market to quickly shake off the ByBit hack and recent developments in memecoins . However, macro market conditions are likely to remain a factor of market volatility in the coming months. The Trump administration has begun implementing its economic policy agenda, which includes cuts to immigration, higher tariffs, and reduced government spending. While many voters may support these policies — they were a centerpiece of Trump’s presidential campaign — most economists expect them to have a negative impact on economic growth in the short term. In addition, the stock market may still be adjusting to the release of DeepSeek’s open source large-scale language model and its potential impact on AI-related capital expenditures. Given the current relatively high stock valuations and increasing macro risks, we can expect a period of risk reduction by investors and increased volatility in the stock market. Although the cryptocurrency and stock markets are not perfectly correlated — which makes cryptocurrencies a good portfolio diversifier — we expect large stock market fluctuations to spill over to cryptocurrency valuations to some extent. However, we do not see any sustained weakening in crypto valuations given the steadily improving fundamentals. The future looks bright for the crypto asset class, supported by improving market structure and regulatory clarity, rising adoption of stablecoins and other technologies, breakthroughs in decentralized AI development, and growing demand for Bitcoin as a reliable monetary asset. Therefore, for many investors who are under-allocated to the crypto asset class (i.e., those with very low or no allocation at all), lower valuations may be an opportunity to increase their allocation and participate in a potential upside. |
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