Original Title: Still Bullish? Or are we in the "Wealth Destruction" Phase Now?

Original Author: Michael Nadeau, Founder of The DeFi Report

Original Translation: Deep Tide TechFlow

Hello readers, last week we conducted some polls on X and LinkedIn, and many of you expressed interest in seeing more data/analysis about the current cycle.

Therefore, the focus of our discussion this week will be answering these questions: Is there still a bull market for cryptocurrencies in 2025? Why are there many bullish factors now, but I still feel pessimistic? How should we dialectically think about the state of the cycle?

Let's go!

Bearish Viewpoint

Before diving into on-chain data analysis, I'd like to share some qualitative analysis of how we view the cryptocurrency cycle.

Early Bull Market Phase

Roughly from January 2023 to October 2023.

This was the period when the market rebounded from the FTX crash. It was a very quiet time (low trading volume, almost silent crypto Twitter). Then the market started to rise again.

Bitcoin's price surged from around $16,500 to $33,000.

However, no one called this phase a bull market. In the "early bull market" phase, most market participants were still in a wait-and-see mode.

Wealth Creation Phase

Roughly from November 2023 to March 2024.

During this phase, we saw significant price surges and notable wealth creation effects. For example, SOL rose from $20 to $200. Jito's airdrop (December 2023) created amazing wealth effects within the Solana ecosystem and repriced Solana's DeFi projects (such as Pyth, Marinade, Raydium, Orca, etc.). The VC market also peaked during this phase.

The Bitcoin price surged from $33,000 to $72,000. Ethereum rose from $1,500 to $3,600.

Bonk's market cap increased from $90 million to $24 billion (26x). WIF's market cap rose from $60 million to $4.5 billion (75x). This phase also planted the seeds for a larger-scale "Memecoin Season."

However, despite this, this period was still relatively "quiet." Your "normie" friends may not have started asking you about cryptocurrency yet.

Wealth Distribution Phase

Roughly spanning from March 2024 to January 2025.

This phase is the "Peak Attention" phase. We often see "WAGMI" (We're All Gonna Make It), fast rotations, new hotspots (though short-lived), and blind investments that pay off. Celebrities and other "crypto tourists" often enter the market during this phase. This phase may see sensational news such as "Tesla buying Bitcoin" or "Bitcoin Strategic Reserve."

Why?

Because new investors enter the market due to this news. They fear they are "missing out on the party."

This is the second wave of "Memecoin Season," evolving into the "AI agent season." In this phase, the market turns a blind eye to many blatantly questionable behaviors. No one wants to point out the issues because everyone is making money.

And then we arrive at the current state.

Wealth Destruction Phase

We believe we entered this phase shortly after Trump took office.

This is the period the market immediately enters after experiencing a top sell-off. The catalysts of the bull market have become a thing of the past. Positive-looking news triggers bearish price actions.

In the current market environment, political actions regarding "Bitcoin Strategic Reserve" have not impacted the market — a crucial signal. In this phase, market rebounds often face critical resistance levels and ultimately fail (as we saw last week with the market's response to Trump's tweet about crypto reserves).

In the "Wealth Destruction" phase, we pay additional attention to some signals:

· Settlement and "panic" events, which disrupt the market but have not yet led to a full sobering-up of the market — we saw a similar situation in DeepSeek AI's panic and tariff uncertainty.

· Investors still hold on to "illusions." Today, we see a lot of discussions about the US dollar's decline and global M2 (broad money) growth (which will be detailed later in the report).

· "Speculators" entering the market. More people are DMing us to "check out their project," more ads are circulating in the market, well-funded projects at major conferences engaging in senseless spending, and more PvP. Moreover, the entire industry is emitting a more "dirty" atmosphere. As the "wealth destruction" period unfolds, bad actors start to show their true colors.

At this stage, hidden issues gradually surface — usually post-settlement. The last cycle started with Terra Luna, which then led to the blow-up of Three Arrows Capital. This was followed by the bankruptcies of BlockFi, Celsius, FTX, among others, ultimately resulting in Genesis's closure and CoinDesk's sale.

Currently, we have not yet seen any blow-up events. The blow-up phenomenon in this cycle should decrease — simply because the number of CeFi companies has decreased, meaning that when the market officially bottoms out, the low point may be higher.

Where will the blow-up come from?

No one knows, but I think there are some "suspects" worth monitoring:

· Exchanges: Pay attention to hidden leverage and/or potential fraudulent behavior in some overseas "B and C grade" exchanges.

· Stablecoins: We are monitoring Ethena/USDe — currently its circulating stablecoin value is close to $5.5 billion. It maintains its peg through cash and futures arbitrage (holding spot, shorting futures) to earn yield — this pattern was a major source of leverage in the last cycle (through Grayscale). Ethena's reliance on centralized exchanges adds extra counterparty risk. Additionally, MakerDAO also has some of its reserves invested in USDe, further increasing the systemic risk in DeFi.

· Protocols: Beware of frequent hacking attempts and potential liquidation cascades triggered by cryptographic asset collateral on platforms like Aave — which still has over $110 billion in active loans (although down from a peak of $150 billion).

· Strategy: We believe that Strategy has excelled in prudent debt management, with the majority of its debt being long-term unsecured debt or convertible bonds (BTC holdings will not trigger additional margin calls). Furthermore, in the last cycle, they were able to withstand a 75% price drop in BTC. However, having said that, if the BTC price experiences a significant decline, it may force Saylor to sell a large amount of BTC at the worst possible time.

The optimal re-entry point into the market is towards the end of the wealth destruction phase. We believe this moment has not yet arrived.

Bearish Data

Decentralized Exchange (DEX) Trading Volume

The trading volume on Solana's decentralized exchanges has dropped by 80% compared to the peak reached after Trump launched his Memecoin. At the same time, the number of active individual traders has also decreased by over 50%. This indicates to us that speculative fervor in the market is waning.

Data: The DeFi Report, Dune

Token Issuance

The number of tokens issued on Solana has decreased by 72% compared to the peak. However, the chain still sees over 20,000 tokens being created daily.

Data: The DeFi Report, Dune

BTC Long-Term Holder MVRV Ratio

Data: Glassnode

Bitcoin's long-term holder MVRV (Bitcoin's "smart money") peaked at 4.4 in December of last year. This is only 35% of the 2021 cycle peak of 12.5, which itself is 35% of the 2017 cycle peak.

Bitcoin rose approximately 80x from low to high during the 2017 cycle, around 20x during the 2021 cycle, and about 6.6x in the current cycle.

The realized price of Bitcoin (i.e., the average cost basis of all circulating Bitcoins) peaked at $5,403 during the 2017 cycle, which was 15.1 times higher than the peak of the 2013 cycle; peaked at $24,530 during the 2021 cycle, which was 4.5 times higher than the 2017 cycle peak. And today's realized price is $43,240, 1.7 times the peak of the 2021 cycle.

Conclusion

· From each of the above data points, it can be observed that the peak values of different cycles exhibit symmetrical diminishing returns. These data clearly demonstrate the existence of the diminishing returns law.

· Bitcoin is now a $1.7 trillion asset. However bullish the news may be, investors should not expect to see sustainable parabolic growth as in the past—too much capital would be required at this point to drive the asset higher.

· When Bitcoin loses momentum, the rest of the tokens in the market will also suffer.

· The speculative frenzy around Solana is waning. Considering that 61% of DEX volume so far this year involved meme coins and that in the past 30 days, less than 1% of Solana users contributed over 95% of gas fees. This is worrying as it indicates that a small part of Solana's users (the "whales") are preying on other users (the "minnows"). Therefore, if the "minnows" tire of losses and opt to exit temporarily (which we believe they are), we might see the fundamentals of Solana deteriorate rapidly.

Data: The DeFi Report, Dune (base + priority fees + Jito tips on Solana)

· Bitcoin's long-term holders have realized profits twice in the past year. Their realized price (i.e., cost basis) is currently around $25,000. On the other hand, short-term holders who bought at the peak now have an average cost basis of $92,000, putting them at a loss. We believe that as the market realizes that Bitcoin's top is likely in at $109,000, these short-term holders might continue to sell at lower peaks.

Data: Glassnode

When all information is laid out like this, we believe it is undeniable that the "typical" cycle has completed, and this is not the so-called "law" at play.

In our view, the best way to process this information is to acknowledge reality and assign a probability to the possibility that the cycle has already peaked. We believe this probability clearly exceeds 50%.

After completing the fundamental analysis, we will attempt to identify any flaws in our argument and stress-test our viewpoint.

Let's get started.

Bullish Viewpoints

I still see significant opposition to bearish views in the market, and bulls are not likely to lay down their arms easily.

This raises a question: Does the bullish viewpoint further prove that we have entered the "wealth destruction phase"? Or are we too bearish and overlooking the possibility of another rally?

In this section, we will go over some observed "bullish viewpoints."

Global M2/Liquidity

Data: Bitcoin Counter Flow

The green box on the right shows: When global M2 starts to rise, BTC is falling. Some have pointed this out and mentioned the correlation between BTC and M2, as well as the 2 to 3 month lagging reaction of BTC to M2 changes.

However, the green box on the left shows: A similar dynamic occurred at the end of the last cycle: as M2 was rising, BTC was falling. In fact, M2 did not peak until early April 2022—5 months later than BTC's peak.

Since mid-January, global M2 has grown by 1.87%, mainly due to central banks shifting from tightening to easing policies.

These are favorable liquidity conditions.

However, we also need to consider the following questions:

1. What is driving M2 growth? We believe this is mainly coming from the decline in the US dollar (down 4% since February 28!), leading to an increase in foreign currency priced in USD, thereby driving global M2 growth. Additionally, the reverse repo facility has recently been drained, and China is also stimulating its economy through loose policies.

2. Will This Trend Continue? We believe the U.S. dollar will continue to decline as investors move funds overseas, but the pace of decline in the coming weeks may not be as rapid as recently experienced. We expect China to continue implementing loose monetary policies against the backdrop of a weakening dollar. However, the Federal Reserve may not take immediate easing measures as they have stated that reserves are still "ample." Additionally, we believe the Federal Reserve remains concerned about inflation.

3. How Are Current Liquidity Conditions Compared to Last Year? We believe that current liquidity conditions should be seen as headwinds compared to last year. Remember, the key is the rate of change, not just nominal growth. We strongly believe that the Federal Reserve and the Treasury Department drove the markets last year through "shadow liquidity," namely "not-QE, QE," and "not Yield Curve Control, Yield Curve Control," to aid the reelection of Biden/Harris. According to Michael Howell of Cross Border Capital, the unwinding of these policies has had a significant impact on the rate of change.

Data: Cross Border Capital

It is estimated that the above-mentioned "secret stimulus" added $5.7 trillion to the U.S. markets at the beginning of 24. This was achieved by exhausting reverse repos + pre-issuing new bonds in the bills.

Finally, we believe investors should closely watch Treasury Secretary Bessent's comments in a CNBC interview last week: "The market and the economy are addicted. We have become reliant on this government spending. It's going to require a detox. It's going to require a detox."

Business Cycle/ISM

As we have previously pointed out, ISM data indicates the start of a new business cycle. We have also noted strong data on capital expenditure (Capex) purchases and small business confidence. We believe this data is real but also clearly shows growth is slowing down. The data we observed last month may have been distorted by some manufacturers engaging in "pre-tariff buying" ahead of expected tariffs. Since then, we have seen some softness in the service sector and new order data, with the February manufacturing PMI reading at 50.3, down from January's 50.9.

Strategic Bitcoin Reserve

Until last Friday, we still saw natives of the crypto space holding out hope for discussions regarding strategic cryptocurrency/bitcoin reserves—despite the market ignoring such news multiple times over the past 6 weeks.

I believe we can now collectively agree this has been a "buy the rumor, sell the news" event.

The Flaw of "Cyclical Thinking"?

We should also acknowledge that the current "cycle" has behaved differently than past cycles. For example:

· BTC hit an all-time high for the first time before a halving.

· This cycle has been shorter, with just a two-year bull run.

· The "altcoin season" has behaved very differently, with bitcoin's dominance steadily rising since early 2023.

· Bitcoin is now fully integrated into the financial system and has the backing of the US government.

If there is a flaw in "cyclical thinking," then perhaps we have not peaked yet. Instead, we might just be in a pause/adjustment/consolidation phase before the next leg up, rather than entering a year-long bear market where prices could drop 75%-80% as seen in the past.

We believe the cycle is evolving. However, we still anticipate that a bear market may take 9 to 12 months to fully unfold.

Conclusion

To summarize our view:

1. We believe we are currently in the "complacency" stage as shown in the chart above.

2. All the bullish catalysts identifiable years ago have now played out.

3. The economy may be heading towards a recession. We believe the Trump administration's stance is very clear. They are essentially telling us that the economy needs a "detox." We should believe their stance. This is very similar to Powell's statement early in 2022 about "pain coming." Our current thinking is that cryptocurrency is the canary in the coal mine. Traditional financial markets will slowly decline/oscillate in response.

4. Given the market sentiment is extremely bearish, we may see a short-term bounce to the low $90K range for BTC. However, we believe this bounce will face intense selling pressure—potentially squashing any hope of a recovery to the bull market structure.

5. As always, we remain open to the possibility of being wrong. Our analysis is based on the information we currently have. As new information emerges, we will update our views.

What would make us bullish again? We will be watching for the following:

1. Reversal of fiscal tightening/Efforts from the Department of Government Efficiency (DOGE).

2. Significant rate cuts/Quantitative Easing (QE) from the Federal Reserve.

3. Massive influx of global liquidity driven by the Federal Reserve (not just China).

4. Major correction/capitulation selling in the S&P 500/Nasdaq.

One concern we have is that the bearish view is becoming consensual. This is worrisome to us. Yet, for now, we must weigh all other factors—because signs are abundant that a cycle top is in, and a bear market is nigh.

Of course, there are many reasons to be bullish over the long term.

Cryptocurrency has truly entered its "inflection" period. It is now finally time to rebuild the financial system on a public blockchain.

Not to mention, we love bear markets. As the tide recedes, the noise from past cycles is easier to strip away, leaving the true signals—which will prepare us for the next bull run.

This is the time for us to do all our best work, and for us to create the most value for our readers.

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