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

Crypto markets are 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 such as 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 shifts 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 are 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, as BTC hovers around $80,000, 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 Bitcoin Strategic Reserve and a constructive shift in the regulatory approach to the crypto industry.

In this article, we assess the drivers behind the recent crypto market weakness and where we are in the broader market cycle, and explore the macroeconomic and crypto-specific factors that are shaping the future path.

2. Macro factors dominate

Both the broader stock market and crypto assets have experienced a turbulent few months, which has wiped out the post-election gains. The main driver of this volatility is the increasing macroeconomic pressures in the form of Trump's aggressive trade policies, retaliatory measures from major US trading partners, and escalating geopolitical tensions - all of which have combined to create an uncertain environment that has suppressed inflation expectations and economic growth.

Despite seemingly positive developments, such as the establishment of a Bitcoin Strategic Reserve ahead of the first White House Crypto Summit, the SEC's withdrawal of a high-profile lawsuit, and the growth of 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 soared 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 appears 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 both 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 in the crypto market

(1) Are retail investors still there?

Despite the major role played by larger macro forces, the intrinsic dynamics of crypto assets continue to shape the market in unique ways. Bitcoin (BTC) remains the main 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 approached 39%. While the decline in Bitcoin dominance has long signaled a rotation into altcoins, marking the start of an “altcoin season,” a reversal of 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 trading volumes. While altcoins in general have struggled to keep pace, meme coins have become the preferred vehicle for retail speculation. However, the recent cooling of the space has further dampened retail sentiment.

(2) ETH’s poor performance and altcoin divergence

Another influencing factor is Ethereum’s (ETH) continued poor performance 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, at levels 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 reversal in ETH/BTC, coupled with an improving macro outlook and regulatory clarity, could be a potential catalyst for altcoins, especially those with more solid foundations and clearer investment themes in structural growth areas.

3. Volatility rises, leverage resets

BTC is volatile. Although BTC’s volatility has weakened over time, it remains prone to large declines and price swings. Recently, we can see that daily volatility is rising, with BTC’s 7-day realized volatility reaching 0.9 in a decline of about 25%.

This volatility has recently triggered a wave of liquidations in spot and derivatives markets. However, the Bitcoin futures market suggests that positions are healthier than they were a few months ago. Futures open interest has fallen to pre-November election levels, indicating that excess leverage has been cleared. Futures open interest has also fallen relative to its market capitalization, indicating that speculative positions have 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 capitalization 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) have indicated an overheated market, while low ratios (1) have indicated an attractive accumulation zone.

Currently, Bitcoin’s MVRV ratio is 1.9, having peaked at nearly 2.65 earlier this year. This puts its current position above the bear market lows but below past cycle peaks, suggesting that we are in the mid-term reset phase. While historical trends provide a useful framework, structural shifts (such as ETF-driven demand, evolving investor profiles, and regulatory clarity) may 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 for 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 foundations have been laid, and interest rate cuts and the start of a new round of liquidity could help drive the next phase of market growth as structural shifts take effect.