The Crypto Market in Q2 2025: Optimistic Recovery Despite Lingering Concerns

Market Recalibration: Recession Fears Amidst Cautious Optimism

The crypto market experienced significant shifts in the second quarter of 2025, as initial optimism gave way to growing concerns about a potential U.S. recession that could prolong the current bear market. Several indicators point to the onset of a new “crypto winter,” with extreme negative sentiment prevailing across financial markets, primarily due to uncertainty surrounding the impact of global tariffs and tightening fiscal policy. Consequently, the total crypto market capitalization, excluding Bitcoin, has plummeted by 41% to $950 billion, after reaching a high of $1.6 trillion in December 2024. Simultaneously, venture capital funding in crypto has plunged to 2017-2018 levels, a 50%-60% decrease compared to the 2021-2022 cycle, significantly limiting the onboarding of new capital into the ecosystem, particularly on the altcoin side. The interplay of these factors paints a complex cyclical outlook for digital assets, which may warrant caution in the very short term. However, there is also a belief that investors need to adopt a tactical approach to markets, as when sentiment eventually shifts to positive, it is likely to happen quickly.

Bitcoin: Growing Dominance Despite Declining Liquidity

Bitcoin’s dominance strengthened in the first quarter of 2025, reaching 63% of the total crypto market share, its strongest position since early 2021. This trend reflects investors’ preference for higher-quality assets during a broader “risk-off” move. Bitcoin’s liquid supply (coins moved within three months) decreased in Q1 2025, suggesting that long-term Bitcoin holders have begun steadily accumulating more BTC since the end of February as the price dropped below $90,000. This decrease in liquid supply could indicate confidence in the asset over the long term, despite recent declines. Spot and derivatives volumes for BTC declined in Q1 2025 from post-U.S. election highs but still topped $8.2 trillion, higher than any other quarter in 2024. However, funding rates for perpetual futures have been subdued due to poor investor sentiment. The entity-adjusted NUPL (Net Unrealized Profit/Loss) trended downward in Q1 2025, hitting 0.47 as of March 31, signaling heightened investor caution.

Ethereum: High Volatility and Low Sentiment

Ethereum, the second-largest digital currency by market capitalization, experienced significant volatility in the second quarter of 2025. A 43% decline in ETH futures open interest (both fixed-term futures and perpetuals) in Q1 2025 indicates massive position unwinding as ETH dropped 45% during this period. This movement aligns with historical capitulation phases in the market. Data shows a 15% increase in Ethereum’s liquid supply, alongside a 2% drop in illiquid supply in Q1, meaning more ETH moved from fixed-term holding or staking into active circulation, likely reflecting heightened selling pressure. The number of daily transactions in the Ethereum ecosystem remained flat in Q1 after increasing by 41% in Q4 2024. While the number of transactions remained stable, total fees fell by 54%. Ethereum’s NUPL indicated that the asset hit the capitulation stage in Q1, for the first time in two years, reflecting deep negative sentiment among investors. Ethereum’s share of the total crypto market capitalization has narrowed in the last six months.

Stablecoins: Increased Usage and Legislative Impact

The stablecoin market continues to expand and play a central role in the crypto ecosystem. Crypto infrastructure developments have dramatically lowered transaction fees, making stablecoins the cheapest way to send dollars. Stablecoins are used for cross-border payments and remittances, buying goods and services, and as a store of value, especially in countries with rampant inflation. The trend of businesses using stablecoins for payments is expected to grow. Stablecoin transaction volume, adjusted for inorganic activity such as bots, reached an all-time high last quarter and is expected to continue growing in 2025. Ethereum’s surge aligns with the GENIUS Act, landmark legislation recently signed by President Trump, which regulates stablecoins. This optimism surrounding stablecoin adoption sent shares of issuer Circle up more than 500% since its IPO in June.

Macro Outlook and Correlations: Is Crypto Decoupling?

Correlations between crypto and U.S. equities increased in Q1 2025, consistent with other major macroeconomic events. However, crypto assets exhibited low or negative correlations with all other major asset classes. This decoupling allows strategic investors to view crypto as a diversification tool within their portfolios. Overall negative market sentiment led to a situation where both Bitcoin and the COIN50 index fell below their respective 200-day moving averages, signaling potential bearish trends in the overall market. Nevertheless, this report emphasizes the need for a tactical approach, as a sentiment recovery can be swift. A cessation of quantitative tightening by the Federal Reserve or additional global fiscal stimulus from major economies like the EU or China could add to global liquidity and support crypto markets, thereby positively altering the current outlook. Conversely, further uncertainty regarding the trade situation or global shocks could prolong negative sentiment and further reduce liquidity.