Attention Deficit

Mid-February 2025 Commentary

The ebullience in the digital assets market from the November 2024 US elections has given way to profit taking and navel gazing. BTC peaked at just around $109k in mid-January but is currently struggling to get back to its six-figure status. Ethereum, the OG of smart contracts, even has many of its long-term HODLers questioning if its original visionaries have lost their way. Then there’s the long tail of over 17,000 other tokens listed on coingecko.com. How should we make sense of all of this?

CryptoMarketCap.com’s Fear and Greed index is hovering around 40, close to as low as it ever has been over the index’s one and half year of history. There are a variety of plausible scapegoats – nagging inflation prints derailing prior expectations for the US Fed to ease rates in 2025, lack of mention of a Strategic Bitcoin Reserve at President Trump’s inaugural speech, DeepSeek’s announcement that slashed valuations on the AI chipmakers and digital assets protocols alike, and President Trump’s call for tariffs that are expected to increase friction within the global economy.

Source: CryptoMarketCap.com

Attention Spread Thin, Especially Among the Memes

Overall, the digital assets market has retained most of its November post-elections gains. Nonetheless, even as long-term investors, we find it instructive to examine the more recent short-term dynamics. A look at the sector-level behaviour of the top 100 tokens by market cap over the last 30 days (roughly from the mid-January market peak) reveals some interesting dynamics. Excluded from the table below are stablecoins and wrapped tokens.

Source: The Tie, Firinne Capital

What we find isn’t unexpected during a period of consolidation, like the one we are currently in.  We should expect investors to avoid the speculative and focus on the “picks and the shovels”, namely Layer 1s which have been building the infrastructure of the new digital assets economy. Meanwhile, the resilience of Centralized Finance (CeFi) platforms, such as Binance, is likely to due to their demonstrable fee-paying user base.  

What is perhaps surprising is the relative underperformance of Layer 2s (L2s), considering their key role in scaling transactions for the Web 3 economy. However, multiple L2s have formed, continue to form, and activity is becoming increasingly fragmented across these protocols. L2Beat.com tracks about 150 of these. The underperformance of this sector is all the more understandable when you consider that one of the more recently dominant L2 is Base, created by Coinbase, for which it continues to garner an increasing share of the L2 transactions and fees but offers no token for digital netizens to hold.

Source: Transaction Count - growthepie

Meanwhile, the tokens that represent the more speculative protocols, the ones still searching for product-market-fit, have floundered. A few will be successful. Many, especially of the long tail of 17,000+ tokens, will likely languish, periodically pump, but continue to fade over time.

The Meme coin sector’s average return of -37% is likely to be a bit misleading. Six tokens make up this cohort of the top 100 largest tokens – DOGE, SHIB, PEPE, TRUMP, BONK, and FLOKI – together totaling about $57 billion in market cap (give or take a few billion dollars, depending on the day). But how many Meme tokens are below this iceberg tip, almost all without any technological use case, each vying for the next user’s attention, while being closely held by one or a few waiting to dump the token on the many? Looking at the average performance of the largest Memes surely must be a statistical textbook definition of having survivorship bias in the dataset.

Legislative Progress?

What about progress on crypto legislation in the US? High expectations had been built in, leading into the US November elections and through the end of 2024. Cryptoasset prices are volatile, and the high volatility compresses expected timelines for getting things done. The lack of tangible progress thus far in 2025 has been a bit deflating.

Paul Atkins, President Trump’s nominee to chair the SEC, is expected to reinvigorate the SEC with policies that are far friendlier to digital assets, but is still awaiting confirmation. The Senate Banking Committee held a hearing on February 5 to investigate debanking practices, or what the cryptoasset community affectionately refers to as Operation Chokepoint 2.0. (Here’s the full hearing and a summary of the session.) However, this amounted to a little more than fact-finding and some first steps towards a more comprehensive solution. David Sacks, President Trump’s appointed AI and Crypto Czar, reaffirmed his support for legislation that supports digital assets development, especially for stablecoins – but that really isn’t anything new, is it?

Perhaps that is what progress is supposed to look like.

Legislation requires fact-finding, compromise between the incumbents and the new, retrofitting a new framework into the old. That is, the legislative process takes time. In late January, acting SEC Chair Mark Uyeda formed a crypto task force “dedicated to developing a comprehensive and clear regulatory framework for crypto assets.”, and put Commissioner Hester Peirce in charge. In Commissioner Peirce’s own words, referring to the regulatory state the cryptoasset industry is in, “…it took us a long time to get into this mess, and it is going to take us some time to get out of it.” Meanwhile, the US Federal government may have deferred on detailing how a Strategic Bitcoin Reserve will be created, but several US states are moving forward with their own plans. Spot ETF applications for Solana, XRP, and LTC are on the table.

There’s a dissonance between the CryptoMarketCap.com’s Fear and Greed Index scraping the lows at around 40 and the strategic plans that are afoot. Focus your attention accordingly.