- December 30, 2024
Vikara December 2024 Update – A Bullish Outlook for Digital Assets in 2025
We hope you all had a great holiday season and wish everyone peace, prosperity and health in the coming year, the year of the crypto bull, at least in our zodiac calendar. To our LPs, we express our gratitude for entrusting us to manage your capital. Here’s to a profitable 2025.
We believe digital asset prices are significantly higher by the end of 2025 for the very simple reason that markets think China’s problems are temporary while US problems are permanent. Neither are true. Despite this outlook, changes in consensus are volatile, and this time will be no different.
Trump is such a good negotiator that he has convinced rate markets, currency markets, half of the Federal Reserve, the US Treasury, and most US trading partners that this time is different. All of these markets have priced in a very hawkish scenario before he has stepped into the White House.
While everyone is focused on the US, China is in the early stages of a sovereign debt crisis. Its decision to crush confidence, lock up entrepreneurs for success, and to destroy its people’s net worth (their homes) will prove to be a horrifying decision for Xi. Fixing it will require drastic change.
The market believes China’s collapse will happen without reverberation. We don’t. The air pocket China will create is the tailwind that drives digital assets higher as global rates decline, ex-US stimulus efforts drive currency devaluations, and US trade policy impacts global growth.
Everything changes on January 20th. Trump knows a strong US dollar hurts the US trade deficit and that high rates hurt US growth. Markets seem anxious, and rightly so, given there are many moving pieces. What we are certain of is that the head winds of the last four years are shifting.
Chart 1 – US Dollar Index (Rebased to Election Day) [Grey: 2016/17, Red: 2024/26] (2016-2025)
Source: Refinitiv, Pitet Asset Managemet, @steve_donze
Macro
The largest theme in macro markets is the collapse of China. Its 30-year yield tells us everything that we need to know about the state of its sovereign debt crisis (Chart 2). It is bad and getting a lot worse before it gets better. Printing money isn’t going to be enough this time. Change is required.
Chart 2 – China 30-year yield (2024 versus rate (2015-2025)
Source: TradingView.com, Vikara Capital
The pivotal piece of the entire China narrative centres around the CCP owning everything, meaning that none of the debts can be called and ultimately everything ends with the government. While we do not proclaim to know who is holding the bag, this assumption seems naïve.
China’s total debt market is ~$14 trillion, of which around 18% is foreign owned debt (the ones holding the bag). This does not include the debt sitting on state owned enterprises, nor the leverage ratios these entities are trading with if their balance sheets were market to market.
During the US’s real estate crisis in 2008, it took months for the true extent of the crises to be known. The collapse drove a change of leadership, regulation, and living standards for millions of people. China’s collapse will be no different, and the renminbi will be used as a release valve (Chart 3).
Chart 3 – USD/CNY (2023-2024)
Source: TradingView.com, Vikara Capital
China is facing its longest period of deflation since 1999, with 2008 not even coming close to five straight quarters of deflation. Inflation is one thing, deflation is worse. We haven’t seen this deflation turn up in Western markets yet but expect it to in 2025 (Chart 4).
Chart 4 – China’s Economy-Wide Prices in Longest Decline Since 1999 (1997-2024)
Source: National Bureau of Statistics, Bloomberg, @KobeissiLetter
Households and corporates are doing what they can do de-leverage, while the CCP tries to restart its credit cycle. The problem China has is that it has destroyed moral, and so getting the real economy to start believing that it is ok to resume business is going to be difficult (Chart 5).
Chart 5 – No credit cycle since 2021 as households stop leveraging up (2011-2025)
Source: PBoC, NBS, WIND, Macquarie Macro Strategy
While the government is talking more broadly about increasing credit into 2025, M1 and M2 money supply still indicates that the governments rhetoric is not enough (Chart 6).
Chart 6 – M1 beat while M2 missed expectations (2012-2025)
Source: PBoC, WIND, Macquarie Macro Strategy
Add to that the abysmal bank lending (and the fact that it continues to decelerate, putting pressure on GDP growth (Chart 7).
Chart 7 – China Loans of Financial Institutions YoY (2002-2023)
Source: @SoberLook
While China continues its slow walk into an abyss, investors from all over the world are piling into US markets believing that it is completely immune to offshore economic slowdowns (Chart 8).
Chart 8 – Foreign Holdings of US Financial Assets : Allocation to Equities (1953-2023)
Source: Topdowncharts.com, LSEG, Federal Reserve FoF Data, @GlobalMktObserv
The concern is that Trump creates a second wave of inflation doesn’t seem to make sense to us when looking at the data. The share of Americans expecting to be better off financially over the coming year jumped to its highest level since the Covid-19 pandemic (Chart 9).
Chart 9 – Respondents expecting financial situation to be better off over one year (2014-2024)
Source: Federal Reserve Bank of New York, @NickTimiraos
Confidence is everything. While China is suffering a lack of confidence, the US has the opposite. Confidence flows into behaviours which flows into activity. Take a look at the 1-year forward expectations for food (Chart 10).
Chart 10 – 1 yr Price Change Expectations: Food (2017-2024)
Source: NY Fed Survey Consumer Expectations, TheDailyShot.com
Expectations for rental markets are loosening too, which is happening the same time as vacancy rates return to previous highs (meaning landlords are likely to have less pricing power) (Chart 11).
Chart 11 – U.S Rental Vacancy Approaching Highest Level in Four Years (2018-2025)
Source: @KobeissiLetter
It is no surprise that this is showing up in consumer expectations data (Chart 12).
Chart 12 – 1-Year Price Change Expectations: Rent (2017-2024)
Source: TheDailyShot.com
Labour markets are loosening too, with leading indicators suggesting the pricing power of new hires is going away. New job postings on Indeed fell 38% year-over-year last week and now stand at the lowest level since August 2020 (Chart 13), suggesting more weakness is coming.
Chart 13 – New job postings on Indeed.com (2021-2024)
Source: Indeed, @KobeissiLetter
Another leading indicator for the labour market is also looking shaky, as the job-finding rate really starts to roll (Chart 14).
Chart 14 – The Job-Finding Rate Collapsed Over the Last Two Months (1995-2025)
Source: Goldman Sachs Global Investment Research, Department of Labor, @PeterBerezinBCA
Construction markets are finally starting to roll also, and it looks likely that these jobs will also start falling away as we move into 2025 (Chart 15).
Chart 15 – US Construction Payroll vs Private Housing Starts (1990-2025)
Source: Steno Research, Bloomberg and Macrobond, @AndreasSteno
US industrial sectors’ capacity utilization rate has dropped to its lowest since April 2021 (Chart 16). The percentage of production capacity being utilized has fallen for 32 straight months. In the past, such a prolonged decline has only occurred during recessions, except for the 2015-2016 period.
Chart 16 – US Capacity Utilization % of Total Capacity SA (1980-2024)
Source: Bloomberg, @KobeissiLetter
While US rate markets have priced in a reduced loosening cycle in the past month, none of the leading indicators support this, and are more supportive of a faster pace of rate cuts in 2025. This is the opportunity we see. Digital assets will sniff out this turn first.
The bears have been vocal that asset managers are fully positioned ahead of a slowing US economy (Chart 17). But are they wrong? What’s not to like about looser labour markets? Lower inflation? A pro-growth administration? The economy is slowing, not collapsing.
Chart 17 – Net % Overweight Equities – Net Overweight Cash (2001-2005)
Source: BofA Global Fund Manager Survey, @Callum_Thomas
Our news feeds have been full of uncertainty this month. Bears are out rattling their sabres as they always do at this time of the year. There is no doubt that China’s air pocket needs to be avoided, but the opportunity it creates is going to be enormous for duration assets.
Needless to say, we are really excited about 2025. You should be too.
Digital Assets
December got off to a fast start for altcoins. The OTHERS index surged from election day to early December, only to fall off a cliff starting December 7, down 26% since that point.
Chart 18 – Crypto OTHERS Index (excludes top 10 tokens by market cap)
Source: Trading View
That said, Bitcoin is still following the previous four-year cycle path as evidenced in Chart 19.
Chart 19 – BTC Market Cycle Bottom ROI
Source: Into the Cryptoverse
Further, the last year of the four-year cycle performs the best and 2025 is the last year! Using Ethereum as an altcoin proxy, ETH has a positive return in 10 out of 12 months in 2017 and 8 out of 12 months in 2021 (Figure 1).
Figure 1 – Ethereum Monthly Returns (2016-2024)
Source: Coinglass
We remain of the view that 2025 will be a strong year for crypto given the combination of macro and regulatory tailwinds and continued industry adoption, as we’ve been outlining in detail over the past year plus.
News we found of interest during December includes the following:
- Deutsche Bank announced that it is developing its own layer 2 blockchain on Ethereum (ETH) using ZKsync’s (ZK) technology to address compliance challenges associated with using public blockchains in the regulated finance industry.
- Blockchain oracle network Chainlink (LINK) announced that they have integrated with Coinbase’s digital asset platform for global institutions, which will provide data and enable full lifecycle management of new tokenized assets on the platform.
- AMP, one of Australia’s largest superannuation funds noted that it invested $27 million in Bitcoin in May 2024, making it the first large Australian superannuation fund to invest in crypto.
- Layer-1 blockchain Sui (SUI) and China’s Ant Digital announced a partnership to tokenize real-world assets concentrating on environmental, social and governance assets.
- Crypto.com launched a US institutional cryptocurrency custody service called Custody Trust Company that is eligible to custody assets for US institutions and high-net-worth individuals.
- Floki (FLOKI) and Mastercard have launched a debit card that will be available in physical and virtual form in 31 European countries supporting eight blockchains and 13 cryptocurrencies.
- The Beam Foundation (BEAM) is launching a $150m venture fund in Abu Dhabi targeting primarily blockchain-based games and gaming infrastructure, but also startups working on solutions tied to artificial intelligence, augmented reality and user-generated content.
- The Arbitrum Foundation (ARB) and Web2 gaming giant Ubisoft announced the launch of Captain Laserhawk: The G.A.M.E., a Web3-enabled top-down shooter, which will look to compete with leading Web2 games.
- Solana oracle provider Pyth Network (PYTH) announced the launch of real-time oil market data feeds for West Texas Intermediate (WTI) and Brent Crude Oil, further expanding its decentralized data services into commodities.
- Crypto.com announced a new partnership with Deutsche Bank to provide corporate banking services across Asian-Pacific markets, covering regions such as Singapore, Australia and Hong Kong.
- Société Générale and Banque de France completed their first blockchain repo transaction involving tokenized bonds issued on the Ethereum blockchain as collateral in exchange for CBDC issued by the Banque de France.
- The Czech government announced that residents would not have to report crypto transactions under $4,200 per year or pay taxes on digital asset gains held for more than three years.
- Solana-based real-world asset (RWA) platform Agridex facilitated its first onchain coffee trade, executed by Tiki Tonga Coffee, a UK-based coffee company, which exported coffee to South Africa. The payment was made in South African rand and settled in British pounds using the Agridex blockchain with the company claiming the transaction had 0.5% transaction fee versus the typical 5%–7% fee on cross-border transactions involving agricultural commodities which having instant settlement versus the typical 5-to-12-day turnaround times in traditional markets.
In regulatory news, the biggest announcements came from the incoming Trump administration. Three pro-crypto appointments were made during December – Paul Atkins as SEC Chair; David Sacks as “White House A.I. & Crypto Czar”; and Bo Hines executive director of the Presidential Council of Advisers for Digital Assets.
Paul Atkins
President Trump announced Atkins appointment on December 4, outlining his qualifications in a Truth Social post.
President Trump announced Atkins appointment on December 4, outlining his qualifications in a Truth Social post.
Figure 2 – Donald Trump’s Post on Paul Atkins SEC Chair Appointment
Source: Truth Social
David Sacks
Trump fundraiser and Silicon Valley veteran David Sacks has been appointed “White House A.I. & Crypto Czar.” A long-time crypto advocate, Sacks was an early investor in Solana and a backer of the crypto investment firm Multicoin Capital.
Bo Hines
In a December 22 post on Truth Social President Trump announced that Bo Hines, who ran a US House Republican candidate in North Carolina in 2022 but lost to Democrat and crypto advocate Wiley Nickel, would become the executive director of the Presidential Council of Advisers for Digital Assets.
Figure 3 – Donald Trump’s post on Bo Hines as executive director of the Presidential Council of Advisers for Digital Assets
Source: Truth Social
With these appointments, amongst others made last month, Trump is setting the stage to deliver on his promise to make America “the world capital of crypto”.
In unsurprising fashion and ending on a low note, the US government and the IRS announced on December 27 final regulations requiring brokers to report digital asset transactions, expanding existing reporting requirements to include front-end platforms, such as decentralized exchanges (DEXs).
Set to take effect in 2027, the rules mandate that brokers disclose gross proceeds from sales of cryptocurrencies and other digital assets, including information regarding taxpayers involved in the transactions.
The Blockchain Association immediately pushed back against the regulation by filing a joint lawsuit with the Texas Blockchain Council the following day.
High profile crypto policy advocates including Uniswap chief legal officer Katherine Minarik said the IRS DeFi broker rule “absolutely should be challenged,” while Consensys lawyer Bill Hughes argued that the ruling was released on “the last Friday of 2024 in the middle of a holiday stretch on purpose” and the ruling is “all cost, no benefit” from a revenue perspective.
Figure 4 – Consensys lawyer Bill Hughes post on the new IRS DeFi ruling
Source: x.com
Chief legal officer at venture capital firm Variant and former Chief Policy Officer at Blockchain Association Jake Chervinsky noted the “unlawful rule is the dying gasp of the anti-crypto army on its way out of power.”
Figure 5 – Jake Chervinsky post on the new IRS DeFi ruling
Source: x.com
Lastly, Miles Jennings, general counsel of a16z Crypto, noted that the rule represents “a fantastical expansion of the words “effectuate transactions” to enable the IRS to ban DeFi.”
Figure 6 – Miles Jennings post on the new IRS DeFi ruling
Source: x.com
Think they nailed it. Hopefully this dies a quick death once the Trump administration takes control of the swamp.
Tokens
We are in the process of writing up a research piece on AI Agents that will be sent to LPs during the month of January.
As we started the note, we hope you all had a great holiday season and wishing everyone peace, prosperity and health in 2025.
Luke McFarlane
Co-Founder & Portfolio Manager
Vikara Capital
Mark Riccio, CFA
Co-Founder & Portfolio Manager
Vikara Capital
Contact Us
Vikara is a liquid, open-ended fund investing in digital assets (excluding Bitcoin and Ethereum) with no lockups (add or redeem monthly). Vikara’s proprietary investment and rigorous risk management processes aim to outperform the broader digital asset markets. Founders have over 40 years combined investment experience at Millennium, Balyasny, Platinum, Merrill Lynch and Macquarie.
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