The Perfect Setup
Before diving into this week’s content, we’d like to take a moment to wish all our readers a wonderful holiday season. Thank you for joining us on this journey as we continue to break down the blockchain industry and discuss how this innovation is shaping the future of the digital economy.
The Perfect Setup
In over a decade of operating in the digital asset and blockchain space, we’ve never witnessed a better setup for exponential growth. The convergence of relentless innovation and a swiftly improving market sentiment is creating unparalleled opportunities for our industry.
It feels reminiscent of 2003–2004, when the internet, after years of stagnation and ups and downs, began its meteoric rise—one from which it never looked back. The digital asset industry is at a similar inflection point.
Today, the $3 trillion sector has the potential to surge to $10 or even $15 trillion in value within a remarkably short timeframe. This shift could happen faster than most anticipate, catching many investors off guard—a glimpse of which we’ve already seen with Bitcoin’s recent price rally, showing much of the market was effectively “asleep at the wheel” (more on that later).
As early-stage investors, our focus remains on identifying long-term trends and fundamentals, cutting through the noise of macroeconomic swings and pundit speculation. We concentrate on the technology itself, insights from our partner VCs, and the strategic positioning of our capital.
In last month's Letter from London, we explored the extraordinary progress made in blockchain over the past four years; Infrastructure advancements have increased capacity while drastically reducing transaction costs. Stablecoins have found product-market fit. Usage metrics have hit record highs. And notably, crypto is emerging as a solution to some of AI’s most pressing challenges.
Last week, Matthew and I also had the privilege of joining Castle Island’s, On the Brink, podcast, where we discussed our 2025 predictions for the industry. If you haven’t yet, we encourage you to give it a listen.
This week, we expand on those ideas to focus on the broader market backdrop and macroeconomic landscape—the ‘setup’ for 2025 and beyond.
The Run Up to 2025: A Constrained Market and Policy Challenges
US Policy Inorganically Constrains the Industry
Over the past few years, the United States—home to the world’s largest capital markets—found itself in a position of inorganic disengagement from the digital asset industry. Regulatory overreach and political maneuvers created formidable barriers, frustrating the growth and maturation of the sector.
Both anecdotal evidence and public disclosures make it clear: many financial institutions and investors wanted to participate in the ecosystem but were either implicitly discouraged or explicitly told to stay away. Below, we summarize some of the most notable challenges:
Regulatory Overreach:
The Biden administration imposed excessive constraints on the digital asset industry, often bypassing public input, open debate, or legislative authority.
A prime example is SAB 121, an accounting provision that effectively bars U.S. banks from custodying crypto assets. President Biden vetoed a bi-partisan vote of the US congress to overturn SAB 121.
Operation “Chokepoint 2.0”:
A concerted effort by multiple government agencies sought to sever ties between digital asset companies, funds, and the traditional banking sector.
Freedom of Information Act (FOIA) requests have revealed how numerous agencies coordinated to cut digital asset participants off from the banking industry.
The SEC’s Politicized Actions:
The SEC became a politically charged tool, targeting credible and compliant companies with lawsuits while offering no clear regulatory framework.
U.S. courts ultimately forced the SEC to approve Bitcoin ETFs, highlighting the agency’s obstructive posture, and rejected key claims in a high-profile lawsuit against Ripple. Despite this, the SEC has continued to pursue aggressive actions against major industry players.
Freezing Public Market Access:
The IPO and SPAC processes were deliberately slowed, stalling public listings for prominent digital asset firms.
Companies like Circle and eToro saw their plans for public offerings effectively stalled derailing opportunities to access broader capital markets.
Marc Andreessen recently captured the sentiment well when he stated that the digital asset industry was operating “with a boot on its neck,” making normal business operations unnecessarily difficult.
These barriers not only slowed the sector’s growth but also prevented the U.S. from fully participating in a new asset class.
The Inflation Spike and Aggressive Rate Hikes
As if regulatory challenges weren’t enough, unrelated economic pressures further compounded the hurdles faced by future-focused industries like blockchain and digital assets. These macroeconomic factors significantly reduced the attractiveness of the industry for investors while restricting its access to growth capital and exit liquidity.
Monetary Tightening Cycle
Unprecedented Inflation:
A combination of post-COVID supply-demand mismatches and an unprecedented increase in money supply fueled record inflation levels across the U.S. and developed economies.
In response, the Federal Reserve launched the most aggressive rate-hiking cycle in history, tightening monetary policy at an unmatched pace to curb inflationary pressures.
Impact on Risk-Based Assets:
The rapid increase in the risk-free rate of return on government treasuries made assets further out on the risk curve—such as venture capital and innovative technologies—less attractive to investors.
Investors demanded higher returns to justify the longer time horizons required for these sectors to deliver capital appreciation.
This shift effectively vacuumed excess liquidity into treasuries and money market funds, diverting capital away from innovation-driven industries.
In short, the combination of inorganic constraints from regulatory bodies and the Federal Reserve’s restrictive monetary policies stifled participation in the digital asset sector.
The 2025 Transformation: A Perfect Setup for Digital Assets
As we approach 2025, it’s remarkable just how dramatically the landscape has shifted from the challenges of previous years, creating the most favorable conditions we have ever seen for growth.
The “Setup”
The stars have aligned across key dimensions:
Regulatory pressures are easing, removing inorganic barriers to growth.
Monetary policy has pivoted toward accommodation, reigniting investor interest in long-term innovation.
The world’s largest financial institutions are actively engaging, integrating digital assets into their strategies.
Adoption metrics and technological progress continue to accelerate, with no signs of slowing down.
Let’s examine these catalysts in detail.
Pro-Crypto Policy Momentum in the US
The political climate in the United States has undergone a seismic shift, paving the way to remove several barriers:
The 2024 elections ushered in the most pro-crypto Congress in history, fostering a climate of collaboration, innovation, and support for blockchain technologies. Expectations are high for common sense regulatory reform and clear rules of the road.
A new direction at the SEC as President Trump stands poised to nominate Paul Atkins for SEC chair. Our Managing Partner, Matthew, sits on the Securitize advisory board with Mr. Atkins.
Central Banks Shift to Monetary Loosening
With inflation tamped down, the era of aggressive monetary tightening has ended, ushering in a more supportive environment for growth-oriented sectors:
The Federal Reserve has pivoted to monetary easing, signaling the start of a new phase for global capital markets.
The European Central Bank has implemented significant rate cuts to stimulate economic activity and reinvigorate investment.
The Bank of England is following suit, reducing borrowing costs and encouraging the flow of capital into innovative industries.
These moves will ultimately make long-duration assets, such as venture capital and innovative technologies, increasingly attractive. As a result, capital will return to sectors poised for long-term growth, including digital assets and blockchain.
Capital Markets Poised for Revival and New Era
The anticipated recovery of global financial markets is unlocking significant opportunities for the digital asset sector:
IPO markets are reopening after years of stagnation, with a substantial backlog of technology companies eager to go public.
M&A activity is accelerating, as companies and investors strategically position themselves to capitalize on this next wave of growth.
Adoption Metrics Continue to Climb
Finally, as we went through in detail recently, adoption metrics continue their steady climb upward – below we briefly summarize:
Stablecoins: Rapidly gaining traction as a reliable medium of exchange and store of value, particularly in cross-border transactions.
Tokenized Treasuries: Institutional and retail investors are increasingly drawn to blockchain-enabled financial products, signaling a shift toward tokenized assets.
Active Wallets: Record growth in active wallet usage reflects the mainstreaming of digital assets and the increasing integration of blockchain technology into everyday life.
The View from London: Don’t Be ‘Asleep at the Wheel’
Bitcoin’s rapid ascent following the recent U.S. election caught many by surprise. It served as a stark reminder of how ‘asleep at the wheel’ most investors have been.
For readers of this newsletter—and our clients—what happened was entirely predictable. When the world’s largest financial market is not just sitting on the sidelines but actively constraining an entire asset class, and those constraints are suddenly lifted, what do you expect to happen? The market’s realization of its under-allocation to one of the most promising growth sectors was inevitable.
Bitcoin’s rapid rise is a wake-up call—a clear harbinger of what happens when the market recognizes its under allocated to one of the most promising growth sectors.
But let’s be clear: Bitcoin is only one slice of what promises to be a very, very large digital asset pie.
While we are strong believers in Bitcoin’s potential, the larger wave of innovation and opportunity in the digital asset ecosystem is just beginning to crest.
The confluence of regulatory easing, accommodative monetary policy, a recovering financial market, and surging adoption metrics has set the stage for a period of unparalleled growth in digital assets.
After a challenging few years, our team has never been more optimistic—or more motivated. The potential ahead of us is enormous. For the first time, innovation and market forces are aligning perfectly, creating a setup reminiscent of 2003–2004, when the internet emerged from its stagnation to embark on its historic growth trajectory.
Today we believe that most investors are still ‘asleep at the wheel’ when allocating to the digital asset sector.
It’s only a matter of time before the market realizes the potential of blockchain technology’s ability to transform financial markets. A shift in sentiment could occur within a remarkably short timeframe, leaving those who are unprepared scrambling to catch up.
We watched this curiously over the past few months as investors realized they were offsides on their bitcoin allocation, then they all rushed to get into the trade.
We’ve have been sitting here waiting the whole time.
Some investors might see Bitcoin hit $100k and assume the opportunity has passed—they couldn’t be more wrong.
The vast majority of investors remain curiously under allocated to blockchain technology – just as they were to the internet in the early 2000s. Most investors saw the ups and downs of the 1990s and stayed away. Those who stayed were rewarded enormously.
Bitcoin’s rise shows what can happen when sentiment shifts rapidly and is just beginning. The same surge of interest and investment will inevitably cascade across the broader digital asset space.
It’s only a question of when, not if.
Thank you for reading,
Mitch
Partner, London
About Blockchain Coinvestors
Blockchain Coinvestors is the best way to invest in blockchain businesses. Our vision is that digital monies, commodities, and assets are inevitable and all of the world’s financial infrastructure must be upgraded. Our mission is to provide broad coverage of early stage blockchain investments and access to emerging blockchain unicorns. Blockchain Coinvestors’ investment strategies are now in their 10th year and are backed by 400+ investors globally. To date we have invested in 40+ pure play blockchain venture capital funds in the Americas, Asia, and Europe and in a combined portfolio of 1,250+ blockchain companies and projects including 95 blockchain unicorns. Blockchain Coinvestors’ first fund of funds ranks in the top decile amongst all funds in its category on both Pitchbook and Preqin. Headquartered in San Francisco with a presence in London, New York, Grand Cayman, Zug and Zurich, the alternative investment management firm was co-founded by Alison Davis and Matthew Le Merle.
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