All Time Highs
Risks & opportunities for institutional crypto in 2025
"Worry is preposterous; we don't know enough to worry." --Wei Boyang
The last two years I wrote a year-end essay. The first one, Beyond the Knee of the Curve, was written just weeks after the collapse of FTX, and the launch of ChatGPT; the second one, The Devils You Meet on the Way Up, reflected on upside risks for 2024. I got some things right, like the huge place that retail and stablecoin payments would play in the narrative, and others wrong: it was Solana-fueled memecoins, not DeFi, that surged off the back of the investment in low-friction trading, and I did not anticipate how explosive the U.S. election would be for the market, powering past $100K to peak at $108K earlier in December 2024.
The Trump Trade
If you had asked me back in January 2024, even after the Bitcoin ETF, I would have predicted that a true price break-out would not come before the election. But I had envisioned that as a slow build through 2025, not what happened on November 8th. A market held down, in Matt Walsh’s words, had “the boot lifted from its neck” and rocketed upwards, leading to excited talk about further growth in 2025. While this essay is not financial advice, and history would suggest it’s not your best source for such advice anyway, I do want to put some words of caution out there. We have seen a lot of price upside during the interregnum before any of Trump’s appointees take office and before any laws have passed. At least some part of the upside is thus in anticipation of future events, and that affords plenty of opportunities in the months ahead for new information to be priced in — and not always favorably.
Some things to watch out for:
In the first Trump administration, a single tweet could drive significant volatility. Whatever the overall price trend, we know it will be extremely choppy all year.
Full normalization requires heavy lifting. Reducing overly aggressive SEC enforcement, shutting down Operation Chokepoint 2.0, repealing the SEC’s SAB 121 guidance and simply putting in place appointees who have a better understanding of digital assets will help the industry, but most traditional institutions will not wade in without new rules. Thus, the “quick wins” may be followed by a very long wait.
Historically most presidents lose Congress in the midterm election, in 2026, and so any legislative change has probably at most an 18 month window. While Trump appears favorable to crypto, it’s not at the top of his list of legislative priorities. Will he really expend limited time and political capital to push through a complex crypto market structure bill that clarifies the SEC vs. CFTC jurisdiction? Or will he take the quick wins and maybe a stablecoin bill and move on? And even if he does, rule-making will follow that, and this also takes time. I am not optimistic that all this fully completes before the chess board shifts.
The relationship between macro factors and Bitcoin is still unclear (Crypto is Macro Now’s Noelle Acheson writes far better on this than me), as is the future path for rates. Will Bitcoin fully decouple from movements in U.S. dollar liquidity? It seems unlikely in the short term, and so this will be an additional driver for volatility as the Fed continues trying to stick a soft landing without reviving inflation, with a president in the White House and a potential Secretary of the Treasury who don’t think Fed independence is a good thing. Messy.
Trump’s views on crypto have shifted over time. If another major fraud were to be uncovered, or if crypto gets further mixed up in geopolitics by Russia continuing to broaden its use of Bitcoin in trade, he could change his mind again in a way much less favorable to the market.
MicroStrategy is making unhedged, leveraged bets on Bitcoin and attracting a lot of attention in the stock market. I think this level of financial engineering happening outside of a financial institution is cause for concern, but even if you fully buy into Michael Saylor’s Bitcoin treasury strategy, the fact that it’s become a proxy for Bitcoin means any problems here — even if just perceived ones — could infect crypto markets.
There is more potential for growth in the market ahead powered by all the factors that supported it in 2024 (institutional adoption; the ETF; RIA’s coming online and starting to build model portfolios with 2% in BTC, etc.) plus movement toward U.S. regulatory clarity. This is all good. But I don’t think we will see even close to full mainstreaming of crypto in this cycle. Without that there is a pretty hard cap on the U.S. market’s potential, and though there will surely continue to be progress around the world, if the U.S. market gets sidelined or even just slowed down, it will be impossible to hit the high notes this cycle. It’s just too big to ignore.
Effective risk management is always important, but particularly when volatility is extremely high, and all of the above in my mind portends a high-vol environment.
What Winning Looks Like
Alex Thorn from Galaxy Research argues that any dismissal of the crypto ETP’s in the U.S. as ‘not in the spirit of crypto’ forgets that what happened in 2024 is what winning looks like. If the ambition is a wholesale rebuild of finance, this requires capital and engagement from traditional finance. With BlackRock’s huge push in support of their crypto ETP and Bitcoin, the industry has that now. Given still-inadequate self-custody wallets in terms of security and usability, it’s also not realistic to require self-custody for everyone. For some investors, the ETP is the right vehicle for now. It also nicely fits into the broader trend of large institutions getting regulatory comfort with Bitcoin first given its clear status as a CFTC-regulated commodity. Even if it’s only a transitional part of the market structure, it’s still very important.
However, winning in 2025 is not going to involve a big move out the risk curve by U.S. traditional institutions; the long-tail assets and more complex instruments will in my opinion remain the domain of crypto-natives and the institutional early adopters. Bitcoin, CME futures and options are all fair game; there’s at least a structure under CFTC rules for other derivatives instruments. But I think the clearest entry point for traditional assets in 2025 is in custody. Repealing SAB 121 is one of the items in the “quick win” category since it can be done by executive action. BNY Mellon received an exception specific to custody for crypto ETP clients and has clearly indicated it wants to go ahead. In Europe and Asia, Standard Chartered has launched a DFSA-regulated crypto custodian, so this a global game, but it’s clear that major global banks have identified the custody business as an early opportunity. If SAB 121 is fully gone, we will see even more in the U.S.. This part of institutional crypto will be the first where traditional finance and crypto-natives go head-to-head.
I expect this will have second-order effects in the institutional crypto business. The crypto-native custodians will embrace regulation in the U.S. and globally, similar to Anchorage Digital’s Singapore MPI license in November 2024 and NYS BitLicense just a month after that. The crypto-natives have the technology and the experience; the traditional institutions have the trust, the relationships and the capital needed to run low-margin, high-complexity businesses at scale. We will see strategic pivots to pure-technology plays, settlements & clearing and other business lines, while M&A is likely to be a big theme, especially if no one makes a successful run at an IPO.
Leverage Returns
I think anyone who has been in capital markets for a long time has a complex relationship with leverage. On the one hand, most every sad story in finance involves some kind of over-leveraged mis-calculation; the 2022 crash has since been labeled the Crypto Credit Crisis for good reason — it had its origins in leverage, and arguably what quickened the exposure of the FTX fraud was pressure on leveraged trades at Alameda Research. But condemning this is kind of like banning chainsaws after a juggling accident: leverage, whether via lending or derivatives, is an important part of many trading strategies, too, so it’s not a bad thing that, say, Galaxy’s loan book was back to nearly $1B as of Q3 2024. So long as liquidation risk and counterparty risk are well-managed and credit underwriting standards stay high, it’s a good thing.
While I would like to have all my 2025 wishes come true — see DeFi, below — I am less optimistic about the institutional plumbing for leveraged trading. In traditional finance OTC derivatives and whole loans are complex operational beasts. Post-trade has gotten inadequate investment due to tight budgets over the last few years, and there is a still a lot to build here. And the ultimate solutions to the problems here I believe require on-chain solutions that the state of the art in privacy-enabled blockchains and smart contracts cannot yet support.
The Once and Future DeFi
The SEC’s aggressive enforcement had a particularly dire effect on U.S. DeFi — VC investments moved offshore, as did some teams. Tokenomics shifted to accent points-based mechanism to incentivize participation, and U.S. investors were locked out by geofencing and other measures. It’s worth a deeper look at why this happened, because it is helpful in understanding what is realistic to expect in 2025.
DeFi protocols with governance tokens supporting a DAO structure are particularly vulnerable to questions about securities status — especially if they activate fee switches which could be interpreted as dividend payouts. Fee revenue — transparent, on-chain, distributed by smart contract — can be a huge boost to projects because it lets investors start to model them as proper businesses. I am expecting more projects will solicit legal opinions and take other measures to place bets on the likely path of legislation, in anticipation that a more friendly SEC will at least take meetings and talk about what are the parameters. That might end up looking something like Hester Peirce’s Token Safe Harbor 2.0 proposal — that if the project is ‘sufficiently decentralized’ it will not be considered a security.
This will be good for DeFi’s growth and development, and will probably reverse the trend of projects moving offshore: it’s a calculated risk, and not an unreasonable one. But … it looks different from an institutional investor’s perspective. A very large traditional asset manager or bank is very unlikely to trade those tokens until the rules are much clearer: a small, agile DeFi project with a supportive crypto VC can take risks that an established, heavily-regulated institution cannot. Even if their Compliance departments get their heads around that particular risk, it’s likely that the other major bugbear — KYC/AML and co-mingling of funds from pseudonymous accounts — is still going to hold back participation in the protocols. Thus a better environment for projects will not necessarily translate into institutional adoption.
Long-time readers of my essays will know that I believe DeFi is hugely important to the future of finance. But what I want to happen in 2025 and what I believe is realistic are two very different things: I just don’t see traditional institutions going head-long into DeFi in the way they will embrace Bitcoin. It’s a bridge too far for 2025 … though this cycle’s retail winners, if they survive, could find themselves in an enviable position in the late 2020’s when these obstacles fully clear.
The World Is Yours (*Some Assembly Required)
Career-wise I see this as a decade-long project; so far, it has kept me off the streets since 2021. I would like to see substantial changes in finance’s legal and technical infrastructure before I retire, and I don’t expect or want to retire next year. Happy new year to everyone in crypto or simply thinking of joining the adventure in 2025. I hope a year from now to reflect on the next stage in the journey. It will surely come with a long wishlist for 2026: the things still not done. And that’s OK.