AP Photo/Mark Humphrey, File
Crypto just had a blockbuster year.
A dozen bitcoin spot ETFs kicked off the industry's rally in January, making it easier for investors to trade bitcoin. In September, a host of central bank rate cuts and other policies added to the rally by paving the way for a growth economy.
But no development has been more critical for digital assets than Donald Trump's Election Day win. Trump advocated for crypto on the campaign trail and, since his election win, has picked several crypto supporters to lead his administration, including Paul Atkins as chair of the Securities and Exchange Commission.
Those moves helped push bitcoin above the key $100,000 threshold for the first time ever, with alt coins gaining steam, too.
The euphoria has pushed the total crypto market value to $3.4 trillion — almost double its size from last year, despite a sell off following hawkish remarks at the Fed's meeting last week.
"This year was a strong one for crypto, registering a 90%+ increase in total market cap," Citi analysts led by Alex Saunders said in a Friday note.
Will crypto continue its bull market in 2025? The Citi analysts' note pointed to six key factors that will help determine the price of crypto in the coming year, including ETF activity, regulation, and the future market for a type of crypto known as stablecoins.
The analysts said they expect the current macro backdrop to continue to support risky trades into the first quarter but warned that the outlook thereafter is less certain. The outlook could turn, they said, depending on Trump's economic policies and stock volatility.
"Macro may turn less favorable over the rest of the year given heightened US policy uncertainty and forecasted equity volatility," they said.
The analysts expect strong inflows to crypto spot ETFs in their first year of trading to continue into 2025, providing a further driver for crypto growth.
Bitcoin spot ETFs have seen inflows of $36.4 billion since they began trading in January, while ethereum spot ETFs have garnered $2.4 billion since hitting the market in July.
The ETFs got the go-ahead from the SEC this year after a yearslong approval process and have served to make trading crypto easier. By buying into the funds, investors can access bitcoin and Ethereum's price movements without having to buy the coins themselves.
"These flows have been the most significant driver of crypto returns, and we expect this to continue in 2025," the analysts said.
Portfolio allocation will also be key to future returns. The analysts said bitcoin would have added value in multi-asset portfolios during this year's rally. Still, it remains a volatile, risky asset, with allocations above 3% contributing to 10% or more of total portfolio risk.
As a result, the Citi analysts say crypto returns need to be priced a few percentage points above equities' expected returns to justify a 1% allocation of portfolios, and far higher for a bigger share.
"For a 5% allocation, performance needs to be higher – double-digits using the S&P's longer-term risk-reward trade-off, or 21% using recent returns where the high reward/risk implies investors need to be compensated well for taking additional risks," the analysts wrote.
The analysts said continued stablecoin issuance, which got a boost after Trump's election win amid renewed enthusiasm in the industry, will help create a healthier crypto market.
Stablecoins are meant to maintain a stable price over time—often pegged to fiat currency like the US dollar—meaning they are less volatile than cryptos like bitcoin, so long as the stablecoin issuer has enough collateral to actually back it up.
More stablecoins entering the space could threaten long-time stablecoin leader Tether's leadership, the analysts say, particularly from a new partnership between Circle and centralized exchange Binance.
"Innovations, partnerships, and new entrants in the stablecoin space pose a risk to Tether's dominance," they said.
Those developments will likely help stablecoins continue to lead the way toward decentralized finance, they add.
"We largely view stablecoin market diversification as a positive as it will lessen the potential for systemic risks from a specific issuer," the analysts said, adding, "Wider-spread adoption of stablecoins with use-cases beyond crypto trading would likely be a driving factor of broader DeFi engagement."
The analysts said the most important theme to track is adoption.
While ETF activity and broader volumes have improved, and stablecoin market caps have risen, more widespread adoption is required to produce returns beyond the post-election euphoria, they said.
The analysts said they are monitoring bitcoin volumes, stablecoin market values, and rising adoption in countries with currency problems, such as Turkey, Argentina, and Venezuela.
Lastly, the analysts said regulation will be a reigning theme next year as Trump takes office. The incoming US President has appointed several pro-crypto candidates to his cabinet. Their policies remain unclear, though the industry generally expects lighter regulation, which could fuel more widespread adoption.
"The result is likely to be a shift from regulation by enforcement to a more legislative-based approach," the analysts said, adding its "less a de-regulation story; more so a removal of headwinds."
