Written by: CoinShares
Compiled by: Scof, Chaincatcher
summary
As we head into 2025, the cryptocurrency landscape continues to evolve at a breakneck pace, influenced by political unrest, technological innovation, and shifting market dynamics. Next year promises to be the most transformative year yet for the industry, impacting regulation, adoption, and innovation.
CoinShares is dedicated to analyzing these key developments, and our 2025 Outlook aims to provide the insight and foresight needed to navigate this rapidly changing space. In this report, we delve into the major forces reshaping crypto today, such as:
- The far-reaching impact of political changes in the United States
- Significant growth in Bitcoin mining
- The rise of companies focused on Bitcoin earnings
- Questions surrounding Solana development
- Ethereum’s fragile growth trajectory
2025: The Year Crypto Pushes Boundaries
By: JEAN-MARIE MOGNETTI, CEO, CoinShares
2024 is undoubtedly a turning point for the cryptocurrency industry. The sector has experienced rapid expansion, continuing to build on the strong foundations laid during the previous market downturn. At CoinShares, we have witnessed this growth firsthand, with our assets under management (AUM) approaching the important £10 billion mark.
We believe this is just the beginning. Recent market developments prompt us to think carefully about future trends. The approval of a Bitcoin spot ETF in the United States in January, and the subsequent approval of Ethereum-related products, have been key factors driving market momentum. We expect more Altcoin ETFs to be launched with the approval of the U.S. Securities and Exchange Commission (SEC), although the progress may be slower than the market expects. Solana appears to be a strong candidate, but established cryptocurrencies such as Ripple's XRP and Charlie Lee's Litecoin are also potential competitors.
Regarding Solana, it’s been a big year for the blockchain. After the FTX crash, Solana quickly rebounded and has won over retail investors with its user-friendly software, becoming a popular choice for launching meme coins. To compete with Ethereum, Solana needs more than just high throughput. Solana must attract institutional investors and develop a clear strategy to address decentralization and frequent network downtime issues.
Solana's case highlights the important impact of meme coins this year. Although some people regard them as insignificant, meme coins have become an important part of crypto culture. Similar to NFT collections in 2020, some meme coins may gain collection value or even become "cultural symbols" in the future.
Nonetheless, Bitcoin remains a focus for us, with analysts predicting significant growth. The adoption strategy pioneered by Michael Saylor’s MicroStrategy is now widely accepted by miners. Many public companies are beginning to diversify their financial assets by purchasing Bitcoin, often at the behest of boards and shareholders, who see Bitcoin as an ideal hedge. Governments are also moving to build up Bitcoin reserves, with initiatives led by U.S. Senator Cynthia Lummis and President-elect Trump. Similar initiatives have been proposed by the BRICS countries, signaling Bitcoin’s growing influence at the top levels of government.
The industry's transformation is also reflected in the entry of many traditional financial companies into the cryptocurrency market. For example, Robinhood recently acquired Bitstamp, or BONY finally launched its custody service. As the US regulatory environment gradually becomes clear, we expect M&A activities to increase, and the valuation gap and sufficient capital will allow traditional US financial institutions to re-enter the cryptocurrency competition. Europe will continue to be the main destination for these transactions.
In the technology sector, the development of AI Agents will redefine the industry. These agents, operating autonomously on the blockchain, are beginning to effectively trade between each other, bypassing human intervention. Coinbase has already deployed its AI-based on-chain trading solution, a move that is likely to be followed.
The Bitcoin Trio: Balancing Economic Uncertainty, Geopolitics, and Technological Evolution
By James Butterfill, Head of Research at CoinShares
In recent years, CoinShares has focused on monetary policy, particularly its role in shaping Bitcoin as an emerging store of value, and the historical inverse correlation between Bitcoin and the U.S. dollar. However, focusing solely on these aspects overlooks Bitcoin's broader potential. We believe that Bitcoin will ultimately play an important role in global trade, driven by its close ties to the growth of the Internet and digital infrastructure. Viewing Bitcoin solely as a store of value underestimates its potential.
Economic factors remain important, with the Fed’s recent 50 basis point rate cut reflecting a shift toward supportive monetary policy, despite continued stability in unemployment claims and high market valuations, boosting investor confidence in Bitcoin. This move suggests that the Fed has begun cutting rates when the economy is stable and is ready to support the market through the economic downturn through monetary policy, creating a “golden middle ground” scenario. However, this optimism has led to a crowded market, with 80% of investors expecting a “soft landing” for the economy. However, this consensus may overlook potential risks.
There are multiple directions for the economy to go in the future. In an optimistic scenario, continued growth in government spending could spur growth and potentially increase inflation, especially if import tariffs are raised, although the specific policies remain uncertain. Conversely, President-elect Trump has proposed including Elon Musk in his plans to cut government spending and tackle the national debt. During his campaign, Trump suggested appointing Musk to lead a new "Department of Government Efficiency" with the goal of cutting federal spending by about $2 trillion. Musk has acknowledged that these measures could bring "short-term difficulties," but he believes they are essential for "long-term prosperity." The partnership highlights Trump's determination to push for major fiscal reforms, leveraging Musk's reputation for improving efficiency and reducing costs. In this new political landscape, the delicate balance between economic growth and low inflation remains critical, but fiscal conservatism, if implemented, could lead to looser monetary policy.
Fed policy is likely to stimulate demand through gradual rate cuts (perhaps to around 2.6%), especially if inflation remains low. However, the lag effect of monetary policy means that such easing is likely to affect the real economy only slowly. Households, especially those on lower incomes, face liquidity constraints that limit potential consumption growth, while the housing market remains sluggish despite the interest rate adjustment.
Trade and labor supply restrictions, as well as increasingly tight lending standards, continue to pose challenges. Business capital expenditures slowed, suggesting that companies, especially smaller companies, are spending more cautiously amid financial stress. Despite productivity gains, weak capital expenditures are seen as a potential threat to future economic growth.
While the Fed has some room to maneuver in a low inflation environment, weak job growth and conservative consumer spending suggest that any economic recovery may be slow, so patience may be needed and the Fed may take larger-scale easing measures than expected. Historically, there has been a strong inverse correlation between Bitcoin and the U.S. dollar, with an average correlation coefficient of about -20% based on daily data and -0.70 based on weekly data since 2018, although this correlation sometimes fluctuates, as shown in the figure below.
Bitcoin vs USD vs NASDAQ. Source: Bloomberg, CoinShares, data available as of close 23 November 2024
This inverse correlation makes sense: Bitcoin is a finite supply asset that is best classified as an emerging store of value, competing with traditional assets such as gold and U.S. Treasuries. In addition, the correlation between Bitcoin and the Nasdaq index shows that Bitcoin's characteristics as a store of value tool interact with its connection with risky assets.
Bitcoin's multidimensional nature stems from its unique role as both a hedge against the dollar and broader economic uncertainty, and a technology asset with growth potential. As a result, we believe Bitcoin may respond differently to changes in monetary policy in 2025 than stocks, which are more directly affected by corporate earnings and macroeconomic trends. When the dollar strengthens, both stocks and Bitcoin may experience varying degrees of capital outflows, depending on the specific context and current economic conditions.
Key factors affecting the correlation between Bitcoin, the US dollar and stocks
Dollar strength vs risk appetite
When the dollar strengthens, often driven by economic uncertainty or “risk aversion,” demand for risky assets like Bitcoin and stocks tends to decline. This could explain why the correlation between Bitcoin and stocks often rises during such periods.
Conversely, a weaker dollar typically means greater risk tolerance and potential lower interest rates, which can attract investors to growth or alternative assets, including stocks and Bitcoin.
Bitcoin’s hedging function:
We view Bitcoin as a hedge against inflation and currency debasement, similar to gold. When the dollar depreciates, demand for alternative stores of value (such as Bitcoin and gold) tends to rise. However, over-reliance on the dollar as a reserve currency and safe haven (as held by "dollar maximalists") can be just as risky as the views of Bitcoin maximalists.
Unlike Bitcoin, stocks are closely tied to economic performance and corporate earnings. When the dollar weakens, multinational companies' profits typically improve (in dollar terms), driving stock performance. However, when the dollar strengthens, stocks may struggle as foreign currency revenue shrinks, while Bitcoin typically sees outflows due to the dollar's appeal.
Liquidity and Macro Trends:
Bitcoin and stocks generally perform well in an environment of loose monetary policy and high liquidity. However, during periods of inflation or rising interest rates, liquidity constraints can have a negative impact on stocks while also putting pressure on Bitcoin, as seen in the 2022/23 period.
While stocks react more directly to changes in interest rates and economic policy, Bitcoin has a more indirect, but still relevant, relationship to these factors. Bitcoin occasionally diverges during market sell-offs due to liquidity constraints or economic concerns, especially when it is viewed as a hedge against traditional markets.
Geopolitical influence on Bitcoin:
Escalating tensions in the Middle East (such as the conflict between Israel and Iran) could disrupt Middle Eastern oil production, causing global energy prices to soar. As a "digital energy storage," Bitcoin could appreciate under inflationary pressure from rising energy prices.
Historical precedents (such as the 1973 oil embargo) show that hard assets like gold—and potentially Bitcoin—can maintain value during energy crises. Additionally, U.S. fiscal support for Israel could lead to increased debt and monetary expansion, which could drive up the value of Bitcoin in the face of fiat currencies. Bitcoin’s decentralized nature also makes it resilient to disruptions in specific mining areas.
In the current economic climate, weak growth could cause Bitcoin to gradually decouple from stocks and, by 2025, Bitcoin could also gradually decouple from the U.S. dollar.
Will the US Dollar Lose Its Reserve Currency Status by 2025?
The short answer is: not in 2025, but the dollar’s dominance as the world’s primary reserve currency is facing increasing challenges stemming from economic, geopolitical, and technological factors. Central banks are diversifying their reserves, with the dollar’s share falling from 71% in 2000 to 59% in 2022 (according to the IMF), as a hedge against the impact of U.S. policy and the volatility of the dollar. Countries like China and Russia are bypassing the dollar for trade to avoid U.S. sanctions, and the BRICS are exploring a new currency for intra-group trade, which some think could be Bitcoin. China’s cross-border payment system (CIPS) offers an alternative to the SWIFT system, while digital currencies and blockchain technology offer additional ways to further reduce reliance on the dollar.
In addition, the United States faces increasing fiscal pressure, with the federal budget deficit reaching $1.833 trillion in 2024. Concerns about a possible post-election debt ceiling crisis have led credit rating agencies to issue warnings about the fiscal stability of the United States. This situation, coupled with the decline in foreign demand for U.S. Treasuries, could undermine global confidence in the dollar. As the United States faces difficulties in resolving its debt problems, emerging financial infrastructure such as China's CIPS, Russia's SPFS, and Bitcoin provide alternatives to reduce dependence on the dollar-centric system, suggesting a gradual shift in the dominance of the dollar.
Bitcoin is more than just a store of value
We often talk about U.S. monetary policy, but that’s not the whole story, as Bitcoin’s growth potential is often overshadowed by its properties as a store of value. Bitcoin’s success story is more than a cyclical buy-sell game; it’s an evolution in finance that has attracted individuals, companies, and even governments with its decentralized, verifiable nature. Far from a “fragile illusion,” Bitcoin’s resilience through multiple economic cycles and continued attention from high-profile businesses and investors reflects the intrinsic value that many see as a hedge against traditional financial risks.
Bitcoin's utility goes beyond speculation; it provides a globally verifiable and secure network that does not require a central authority. This is not just code, but a network governed by consensus that ensures transparency and security of transactions. This decentralized model is particularly valuable for individuals and countries seeking financial autonomy, especially in regions with high economic volatility.
While Bitcoin has yet to rival traditional assets in economic productivity, its continued adoption and development, such as the implementation of the Lightning Network, has begun to demonstrate real-world applications in remittances, microtransactions, and financial inclusion. Viewing Bitcoin as merely a speculative asset ignores its potential for future applications in digital finance and technology.
Bitcoin's record inflows signal a shift, but price surge remains elusive amid policy and political headwinds
By James Butterfill, Head of Research at CoinShares
As of the end of November, inflows this year have reached $37 billion. If there had not been a significant market drop in December, this inflow would have been nearly three times the record of $10 billion set in 2021. The surge was mainly attributed to the launch of the US spot Bitcoin ETF, which attracted $32.6 billion in inflows. After adjusting to take into account Grayscale's outflows, newly launched ETFs have achieved record inflows of $50.6 billion so far.
Total global digital asset fund inflows (in millions of USD). Source: Bloomberg, CoinShares, data available as of close 23 November 2024
Assuming total US investable assets of $14.4 trillion, if 10% of investors decided to allocate $37 billion of their funds to Bitcoin, this would reflect an average portfolio allocation of 2.6%. This is double our 1% forecast at this time last year, with projected inflows of $14.4 billion. US ETF providers are now the second largest Bitcoin holders in the world, holding 1.08 million Bitcoins, a level of demand that is more than double the 191,000 newly minted Bitcoins from mining. Globally, ETP holders currently hold 1.3 million Bitcoins in custody.
Bitcoin ETF demand and supply. Source: Bloomberg, CoinShares, data available as of close 23 November 2024
This marks an extremely positive event in Bitcoin's history, although we have yet to see the surge in price that many (including ourselves) expected. Based on the relationship between inflows and price (detailed here), our model suggests that with this level of inflows, Bitcoin should have already surpassed the $100,000 mark; however, the price remains hovering near its all-time high of $70,000. We attribute this to several factors, particularly monetary policy and political climate, which we believe have been the main drivers of Bitcoin's price recently.
The Federal Reserve’s monetary policy shift took longer than expected, not arriving until September, even though the December 2023 polls expected the shift to occur in March of this year. The delay is likely due to a combination of excess household savings, stronger-than-expected economic growth, and persistently high inflation. Political developments also presented headwinds, with polls suggesting the Democratic Party could dominate this year, dampening expectations for a more relaxed regulatory stance on digital assets. In addition, investment platforms took their time to support Bitcoin ETF trading, while Grayscale’s closed-end Bitcoin fund brought significant selling pressure, with $18.3 billion worth of funds sold by originally closed holders this year.
Ethereum funds have underperformed Bitcoin this year. Before Ethereum launched, Ethereum’s total ETP AUM was 20% of Bitcoin’s. At this ratio, $3.2 billion of inflows were expected. However, actual inflows were only $1.11 billion, taking into account $3.3 billion of outflows from Grayscale’s existing holdings. This gap may stem from concerns about Ethereum’s Layer 1 revenue, especially after its June Dencun upgrade, which we will discuss further here.
We are optimistic about the outlook for inflows in 2025. With increased political transparency, especially discussions about the potential impact of the Trump administration, there is a chance that Bitcoin could be seen as a strategic reserve asset, driving prices higher, similar to the post-election movement in 2020. Monetary policy also appears poised for continued easing, not only in the United States but also at many major central banks around the world. If the U.S. government acquires 5% of the total Bitcoin supply, this would represent an inflow of approximately $67 billion. This, coupled with the clear support of the U.S. government, could encourage hesitant investors to increase their holdings.
Under Trump, the U.S. is poised for major cryptocurrency reforms
By Max Shannon, Research Analyst, CoinShares
With Donald Trump's victory in the 2024 presidential election, the United States is poised to make major changes in cryptocurrency regulation in an effort to become a global leader in the digital asset space. Along with Vice President-elect J.D. Van Si, Trump pledged to promote a pro-crypto environment focused on innovation, investment, and financial sovereignty.
Regulatory reform
Trump has been openly critical of the stance of the U.S. Securities and Exchange Commission (SEC) and its chairman, Gary Gensler, particularly on the agency’s approach to regulating digital assets. Gensler has announced that he will resign on the day of Trump’s inauguration (January 20). More pro-cryptocurrency SEC commissioners could lead to friendlier cryptocurrency regulation, laying the foundation for a cryptocurrency renaissance.
Fortunately for the cryptocurrency industry, Trump’s vice president, Vance, has been pushing for regulatory clarity, drafting proposals to reform the way cryptocurrencies are regulated by Washington’s two largest regulators.
Coinbase, A16Z, and Ripple are the 9th, 10th, and 11th largest donors to the Trump campaign: less than Citadel or Susquehanna, but more than firms like Bloomberg and Blackstone. Crypto-only SuperPACs like Fairshake, Defend American Jobs, and Protect Progress are the 8th, 13th, and 17th largest fundraising organizations, respectively. This will help push pro-crypto legislation in the red majority House and Senate.
Both Trump and Vance support FIT21 to reform the market structure and are willing to end Operation Chokepoint 2.0 and accept stablecoins to strengthen the international dominance of the US dollar. This should have a positive impact on Altcoin and mergers and acquisitions (M&A) activities, as traditional financial companies will gain more clarity and confidence in the crypto asset space.
Support Bitcoin mining
The Trump administration plans to make the United States a global hub for Bitcoin mining. Throughout the campaign, Trump has met with miners and pledged to protect their operations, emphasizing that Bitcoin mining is essential for financial independence and national security. He sees Bitcoin miners as defenders against central bank digital currencies (CBDCs), which his administration opposes. At the Bitcoin 2024 conference, Trump pledged to "keep 100% of all Bitcoin currently held or acquired by the U.S. Government...which will effectively become the core of the National Strategic Bitcoin Reserve."
Trump’s newly appointed pro-crypto Treasury Secretary Scott Bessent and successful hedge fund manager and CEO of crypto-friendly financial services firm Cantor Fitzgerald Howard Lutnick have been nominated to lead the administration’s trade and tariff strategy as Secretary of Commerce. These appointees are likely to support Trump’s grand goal of Bitcoin as a fiscal reserve asset. While Trump’s comments should be taken with a certain amount of skepticism, this statement is undoubtedly positive.
In the short term, miners who focus solely on bitcoin mining are likely to outpace those who have diversified their revenue streams, such as into artificial intelligence or machine building.
Autonomous Management and Financial Sovereignty
Trump is also a strong supporter of self-management. At the same conference, Trump noted that he believes individuals should control their own digital assets without government interference. However, Trump's stance on issues such as sanctions and bank secrecy laws tends to be neutral or conservative. Therefore, his ambitions for self-management may face challenges, especially on issues such as financing illegal activities or money laundering. While this policy will not directly affect the price of Bitcoin or individuals, it is a positive step towards private property protection for the United States.
The economic prospects of cryptocurrencies
Trump's economic policies tend to be expansionary both fiscally and monetaryally, and he supports further tax cuts and wants the Federal Reserve chairman to take a dovish stance, lowering interest rates, increasing the debt burden and driving cheap capital into risky assets such as cryptocurrencies.
In summary, Trump's victory means a pro-cryptocurrency government with policies that support Bitcoin mining, self-management, banking and market structure regulation, and stablecoin legalization, creating a favorable environment for innovation and growth of digital assets. As the United States shifts toward these policies, while Bitcoin is still likely to be one of the best performing assets in 2025, other currencies (Altcoins) may perform more prominently.
The Bitcoin Mining and AI Boom: Debt, M&A, and Clean Energy
By Max Shannon, Research Analyst, CoinShares
Miners increase use of debt markets as interest rates fall
As interest rates gradually return to normal levels, Bitcoin miners are expected to return to the debt market. Companies like TeraWulf, Core Scientific, Marathon Digital, and Bitdeer Technologies have raised more than $2.5 billion through convertible bond offerings. In the future, this trend is likely to continue, with miners using these instruments to reduce capital costs, fund strategic growth, and more efficiently manage existing debt. This financing method is particularly attractive given that traditional debt markets are limited by the industry's high volatility.
As high interest rates and industry volatility make access to traditional debt markets more difficult, convertible bonds offer a more balanced approach to capital structure management with less dilution. By reducing reliance on equity financing, these companies are able to pursue diversified strategies, as reflected in the differences in their convertible bond pricing.
Another form of debt financing also shows some potential. Bitcoin-based financing is expected to grow as miners accumulate more Bitcoin on their balance sheets. We’re already seeing this with Marathon’s $200 million line of credit, followed by Canaan’s $22.3 million loan, which was secured by 530 Bitcoins. This trend coincides with the rise in the value of Bitcoin, making it a more valuable collateral. Miners can therefore issue more depreciating fiat debt against their growing Bitcoin holdings, increasing their financial leverage.
Miner financing (millions of USD). Source: Bloomberg, CoinShares, data available as of close 01 October 2024
Further mergers and acquisitions among miners
Acquisition activity among miners, such as Cleanspark’s acquisition of Griid, Riot’s deal with Block Mining, and Bitfarms’ acquisition of Stronghold (all focused on operating facilities), is expected to increase. Acquiring distressed or turnkey mining operations is more cost-effective than building new facilities from scratch. While the timeline for developing a greenfield project typically takes years, acquiring and upgrading existing infrastructure can be completed in just a few months. This significantly shortens time to market and accelerates time to return, making it a strategic priority for miners.
Weighted average cost per MW (US$ million). Source: Industry Sources, CoinShares, data available as of close 17 October 2024
AI hyperscale computing company focuses on clean energy triple redundancy
Miners may continue to enter into land acquisition option agreements to expand their energy portfolio to cope with the upcoming hash rate and/or GPU computing power. We believe that the most favored sites feature Tier 3 clean energy redundancy and a gigawatt-level power supply pipeline. For example, TeraWulf's Lake Mariner site relies entirely on hydroelectric power and according to management, the site has a power usage effectiveness (PUE) of 1.2. The site is located in New York, which has a cooler climate than Texas, and they can further reduce the PUE by drawing water directly from the lake.
Once these high-quality clean energy sites are fully utilized, attention may shift to regions with a strong renewable energy mix, such as the PJM interconnection market (about 60-65% renewable energy). Based on this, Bitdeer's Ohio site (791 MW by fiscal 2027) and TeraWulf's Nautilus site (2.5 GW) may gain a competitive advantage.
As a result, we expect that companies with clean energy capabilities or located in attractive regions will be more likely to attract AI partnerships than those that rely heavily on less desirable locations like Texas.
The End of the Bitcoin Mining ASIC Triumvirate
Author: ALEXANDRE SCHMIDT, CoinShares CFA - Index Fund Manager
Since the release of the first Canaan Avalon chip in 2013, the ASIC manufacturing industry has been dominated by a few key players. China has always been at the heart of the industry, with the vast majority of ASIC designers and manufacturers located in China, even after the government’s mining ban in 2021. Today, the market is effectively dominated by three major players, with Bitmain dominating, followed by Canaan and MicroBT (collectively referred to as the “Big Three”), all of which are headquartered in China but also have manufacturing facilities abroad.
Estimated Bitcoin ASIC market share. Source: Estimated by CoinShares
As Bitcoin adoption and price have grown, mining has evolved into a more professional industry. Since the introduction of the first ASIC chip, the Bitcoin network's hash rate has grown 600,000 times from about 1 PH/s to over 600 EH/s today. Following Moore's Law, each new generation of mining machines has significantly improved performance and efficiency, driving down manufacturing costs and price per hash.
The Bitcoin ASIC market has become quite large. Canaan's 2019 IPO documents indicate that the Bitcoin mining machine market has grown from $166 million in 2014 to $3.2 billion in 2018. Over the past three years, the Bitcoin network's hashrate has grown by 100 EH/s to 200 EH/s per year. Although not all of the growth comes from newly purchased equipment, given the current state of mining economics, only the latest generation of efficient mining machines are profitable, so we believe that almost all of the growth comes from newly purchased mining machines. Based on the current mining machine price of about $15 per TH/s, we estimate that the size of the Bitcoin ASIC market in 2024 will be between $15 billion and $30 billion, a figure confirmed by industry insiders.
New entrants challenge traditional giants
As the market regains momentum in the second half of 2023, new projects begin to emerge, especially those from Auradine, Bitdeer, and Block Inc. For the first time since the advent of ASICs, several competitors are simultaneously accelerating the launch of new, high-performance mining machines that have the potential to eventually challenge existing industry giants, especially Bitmain.
The horizontal axis is: manufacturer, latest model, efficiency, release date. Source: CoinShares, ASIM Miner Value, company data (as of October 16, 2024)
The big question is whether these new projects will be successful, or if we will see another brief moment of glory for mining startups. Auradine is a US-based Bitcoin ASIC design company that has received a $49 million investment from Marathon, whose CEO Fred Thiel also serves on the company's board. Auradine's first Teraflux miner is released in the fourth quarter of 2023, and its latest miner has an efficiency ratio of 15 to 16 joules per terahash (J/TH), which is almost comparable to Bitmain's latest Antminer S21 XP Pro, which has an efficiency of 13.5 J/TH. According to CEO Sanjay Gupta, the company has more than 30 customers, although Marathon appears to be the largest customer, having paid $44.1 million in advances over the past year.
Bitdeer is a publicly traded company that was spun off from Bitmain in April 2023 and initially operated solely as a Bitcoin mining company. In March 2024, the company announced the launch of its own Bitcoin mining machine, using the SEAL01 chip. By September 2024, Bitdeer completed testing of its SEAL02 chip, which achieved an efficiency of 13.5 J/TH in an underclocked setting. These chips have been integrated into Bitdeer's SEALMINER A2 miner, and mass production began in October 2024. Bitdeer's competitive advantage is that it has hired former Bitmain engineers who have a successful track record in launching Bitcoin mining machines at scale and have industry connections that can secure supply chain agreements.
The last entrant is Block Inc., which is developing a Bitcoin mining chip using a 3nm process. Led by Twitter founder and Bitcoin advocate Jack Dorsey, Block's goal is to "democratize Bitcoin mining." Although Block is primarily seen as a fintech company, it has extensive ASIC experience by developing chips for Square point-of-sale systems. In July 2024, Block and Core Scientific announced a partnership to develop and deploy a 15 EH/s miner using Block's new chip. The project is jointly participated by Block's Proto team, ePIC Blockchain Technologies, and Core Scientific. However, unlike Auradine and Bitdeer, Block's collaboration with Core Scientific has not yet released a working prototype, and it has not yet been announced whether Block's chips or the jointly developed miner will be widely commercialized.
Success of new competitors depends on reliability and scalability
Whether these emerging competitors can challenge the dominance of the “top three” players will depend largely on whether they can successfully launch viable products and quickly scale up production. This, in turn, relies on securing production capacity at semiconductor manufacturing plants. In addition, mining operators’ skepticism about new products, especially concerns about their reliability, also poses a challenge. However, the emergence of new competitors is welcome because it has the potential to weaken the pricing power of the top three manufacturers, which in turn will prompt mining machines to become more efficient and ultimately more profitable.
Bitcoin is heading to the US financial industry
By: Matthew Kimmel, Digital Asset Analyst, CoinShares
Since launching in February, U.S. Bitcoin ETFs have been a huge success. Of the 575 ETFs launched in the U.S. by 2024, the top four by inflows are all spot Bitcoin products: IBIT, FBTC, ARKB, and BITB. They have seen positive inflows in nine of the ten months since launch. In less than a year, the total holdings of these spot Bitcoin products are close to 1 million Bitcoin, almost as much as any known entity holding the coins - which is huge, although still slightly less than the estimated 1.1 million Bitcoins held by Satoshi Nakamoto. For comparison, the inflows that Bitcoin ETFs have seen in their first year, compared to the five years it took gold ETFs to reach this level since their launch in 2004. Such strong demand raises an important question: Who is buying these ETFs? And can their inflows be sustained?
Professional Investors Account for 20% of U.S. Bitcoin ETF Holdings
Through the 13-F documents, we can understand the sources of investors who buy these ETFs. These documents are submitted by investment managers with more than $100 million in assets under management, and the content shows that about 20% of the assets in the US spot Bitcoin ETF are held by professional institutions and fund managers, which also means that the remaining 80% mainly come from retail investors or smaller financial professionals.
According to the 13-F form, there are more than 1,200 holders of these ETFs. 984 of these holders are investment advisors, accounting for 78% of all filers, but they only account for 41% of the total assets under management (AUM). Understanding the background of these investment advisors helps to understand the situation more comprehensively. For example, Goldman Sachs' $741 million position may be more of a general liquidity provider, while companies like Ark Investment Management and VanEck hold $206 million and $80 million of funds respectively and have launched their own spot Bitcoin products.
Hedge funds also have a fair share of the pie, with larger average position sizes and portfolio weights. A total of 138 hedge funds hold these ETFs, collectively representing 38% of total assets of 13-F filers. Notable holders include Millennium Management, Schonfeld Strategic Advisors, and Aristeia Capital. We suspect these inflows are less stable, as hedge funds tend to be more opportunistic in their allocations. Additionally, basis trades have been attractive this year and may be a significant source of hedge fund demand.
US Spot Bitcoin ETF Daily Volume (USD Billions) vs. Futures Annualized Rolling Benchmark (3 Months) – All Exchanges. Source: Bloomberg, Glassnode, CoinShares, data available as of 22 November 2024
Bitcoin ETF has a high probability of continued success
The future path of Bitcoin ETFs depends on several factors. Encouragingly, there was a 20% increase in 13-F filings from March to September 2024. This growth came primarily from institutions classified as investment advisors, showing that Bitcoin ETF adoption is growing. However, while hedge funds still make up a large portion of assets under management (AUM), they are more inclined to trade rather than hold these ETFs for the long term. If market sentiment changes, or if certain trades reverse, these funds could quickly exit their positions, leading to outflows.
Another factor to consider is the relatively small allocation of Bitcoin ETFs in portfolios. Bitcoin is still widely viewed as a high-risk asset, and many managers consider it in the category of "alternative investments" - we also call it digital gold. Alternative investments are generally smaller in size than stocks and bonds, which limits their potential allocation in portfolios. Still, Bitcoin ETFs have been on the market for less than a year, and many professional investors may still be obtaining internal approvals or conducting due diligence through investment committees.
Given the size of the market for financial professionals in the U.S., even a small portfolio allocation could bring significant inflows, provided Bitcoin becomes a standard component of modern portfolios. However, Bitcoin inclusion is not yet widespread, but its clear advantages as a risk diversification tool are being recognized, and there are already several encouraging examples. For example, Fidelity included its FBTC product in its all-in-one conservative ETF; Michigan and Wisconsin have included Bitcoin ETFs in state pension funds; and recently, Emory University also held some Bitcoin ETFs in its endowment fund portfolio.
From a retail perspective, this still appears to be the dominant source of demand for Bitcoin ETFs, and there is still room for growth. Certain brokers, such as Vanguard, have yet to open access to Bitcoin ETFs. Once they open these services, and companies like Fidelity, Robinhood, and Interactive Brokers continue to provide access, the number of retail participants may grow further.
The outlook for a US Bitcoin ETF looks positive
The launch of Bitcoin ETFs clearly demonstrates the demand of U.S. investors to gain exposure to Bitcoin through familiar financial products. These ETFs have not necessarily triggered a rush of evaluations of Bitcoin investment potential by professional financial managers, but given market demand, the smooth progress of internal approval processes, and the pressure from peers to gradually recognize Bitcoin as a viable asset, we expect more evaluations to follow.
Gaining access is the first step, and evaluation is the next — a process that will likely unfold over time. Bitcoin enthusiasts should be cautious about declaring “institutional money has arrived,” as allocations in portfolios are relatively small, and institutions reporting on 13-Fs account for only 20% of total assets under management. Still, there’s a lot to be excited about.
The rapid success of these products speaks volumes about the strength of demand for Bitcoin and could drive greater adoption if professional investors begin to consider Bitcoin as part of a standard portfolio. The journey of Bitcoin ETFs has just begun, and the future is bright.
The rise of Bitcoin yield companies
By: Satish Patel, CoinShares CFA - Investment Analyst
Bitcoin income companies are reshaping the landscape of corporate finance, with more and more companies using Bitcoin as a reserve asset, a trend that reflects Bitcoin’s potential not only as a store of value, but also as a means of generating income. The income mentioned here includes:
- The growth of Bitcoin holdings relative to company shares;
- Yield farming, which is generating returns by lending Bitcoin;
- Alternative strategies to generate income using derivatives in order to benefit from Bitcoin reserves.
MicroStrategy has become synonymous with corporate Bitcoin investment, holding 402,100 Bitcoins with a market value of approximately $39.8 billion as of December 5, 2024. The company introduced its own "BTC Yield" metric to measure the effectiveness of its strategy and help investors understand how Bitcoin acquisitions create value for shareholders. For a detailed analysis of the MicroStrategy investment case, see our in-depth analysis.
Similarly, Block has pledged to use 10% of its Bitcoin product profits to acquire Bitcoin, effectively adopting a dollar-cost averaging strategy to strengthen its capital reserves. Bitcoin mining company Marathon Digital has also adopted a similar approach to MicroStrategy, using low-interest debt to acquire Bitcoin. In August 2024, the company issued $300 million worth of convertible bonds with an annual interest rate of 2.125%, followed by $1 billion and $850 million in financing in November and December 2024, respectively, with an annual interest rate of 0%. This practice allows Marathon to take advantage of favorable borrowing conditions to increase its Bitcoin reserves.
The horizontal axis is: corporate Bitcoin balance (excluding Bitcoin miners), total Bitcoin held, and total Bitcoin/market value. Source: BitcoinTreasuries.net, Bloomberg, CoinShares, data as of 5th December 2024
A notable development this year was the U.S. Securities and Exchange Commission (SEC) allowing BNY Mellon to treat Bitcoin and other cryptocurrency securities as assets rather than liabilities, which enables the bank to provide custody services for cryptocurrency exchange-traded products. This classification is consistent with MicroStrategy's efforts to improve the accounting treatment of its Bitcoin holdings, which previously faced impairment losses under current GAAP standards. By treating Bitcoin as an asset, companies such as MicroStrategy can present a more favorable financial situation, potentially mitigating the negative impact of Bitcoin price fluctuations on reported earnings. In addition, this change may also enhance MicroStrategy's ability to borrow Bitcoin at typical market interest rates (4-6%), thereby offsetting its interest payments.
Semler Scientific is a medical technology company that uses Bitcoin as its main reserve fund, holding 1,873 Bitcoins with a market value of approximately $185 million as of December 5, 2024. In addition, Metaplanet, a traditional Japanese hotel company, has also begun accumulating Bitcoin and implemented MicroStrategy's BTC yield indicator. As of December 5, 2024, the company holds 1,142 Bitcoins and is actively generating income through the use of Bitcoin options, with plans to achieve profitability this year. These moves highlight the general trend of traditional enterprises and technology-oriented companies turning to Bitcoin yield strategies, which is expected to accelerate in 2025.
In 2024, more and more large companies began to accept cryptocurrencies as a means of payment, suggesting that more companies may include Bitcoin in their treasury reserves in 2025. For example, luxury car manufacturer Ferrari has begun accepting cryptocurrency payments in the United States and plans to expand to Europe. In addition, Microsoft is evaluating shareholder proposals to consider including Bitcoin in its investment strategy and is expected to make a decision at a meeting on December 10, 2024. Retailers such as AT&T, Whole Foods, Home Depot and AMC Theaters also accept Bitcoin payments through platforms such as BitPay, Flexa and Spedn, and cross-industry acceptance is increasing. Currently, e-commerce giants such as Amazon, Shopify, Nike, Expedia and PayPal are already involved in the cryptocurrency field, whether through payments or investments, and may also consider including Bitcoin in their treasury reserves in 2025.
According to BitcoinTreasuries.net, as of December 5, 2024, the total amount of Bitcoin held by companies reached approximately 939,190, a significant increase from 80,000 in December 2020, with public companies alone holding 528,772, or approximately 2.5% of the total Bitcoin supply. This strong accumulation trend is expected to continue and may further strengthen in 2025, especially as regulatory clarity and political developments create a more stable framework for corporate investment in digital assets.
Follow the latest developments of Lightning Network
By: CHRIS BENDIKSEN, Head of Bitcoin Research, CoinShares
Due to its focus on security and simplicity, Bitcoin sacrifices scalability at a fundamental level in order to maximize decentralization and censorship resistance. As a result, its data processing capacity is severely limited, resulting in slower processing speeds and higher transaction fees during peak demand.
To alleviate these issues, various second layer (L2) solutions have been proposed to move small transactions off of L1 to provide dedicated space for higher capacity and fast processing.
One of the most successful solutions is the Lightning Network (LN). Designed to complement Bitcoin’s base layer, the Lightning Network enables low-cost, instant payments through pre-funded channels that operate outside of the Bitcoin main network but still leverage the security of the main chain when needed.
In 2024, the Lightning Network has solidified its role in the Bitcoin ecosystem, with adoption and development continuing to rise. Below, we will briefly explore the current state of the Lightning Network, focusing on its adoption, challenges, and future development trends.
Most publicly visible network metrics remain stable through 2024
Looking at some standard network metrics, the size and capacity of the Lightning Network have remained largely flat in 2024. In fact, many of these metrics have remained flat or even declined since 2022. According to Bitcoinvisuals, the number of nodes is now about the same as in late 2021, and the network’s total capacity is around 5,300 BTC, roughly the same as in early 2023. The total number of channels peaked at around 84,000 in early 2022, and has since decreased by about 35% to 55,000 currently. That doesn’t look too promising. So, what exactly is going on?
In last year’s flagship annual report on the Lightning Network, River Financial laid out a number of reasons why simply using and tracking simple public data points can be problematic when analyzing the Lightning Network:
- Unlike Bitcoin’s L1, transaction information on the Lightning Network is not public - only the parties directly involved (sender, routing node or receiver) can know any information about the Lightning Network transaction.
- An increase in the number of nodes does not mean more usage — many Lightning Network users prefer to use Lightning Service Providers (LSPs) rather than managing their own channels, and LSPs can serve an unlimited number of users through a single node.
- Due to its privacy properties, the growth in Lightning Network usage cannot be accurately assessed through simple network metrics alone and is best assessed through traditional metrics such as funds raised by the industry.
We should briefly touch upon why Lightning Service Providers (LSPs) have become so common recently.
Lightning Service Providers (LSPs) offer several advantages to both those who run their own nodes and those who want to access the Lightning Network through a fully managed provider.
For example, users who run their own nodes can use LSPs to access inbound liquidity for a channel and pay a fee. In this way, users leverage the balance sheet of LSPs, using their relationships and capital to provide users with more choices and more efficient payment paths. But even so, running a dedicated lightning node still has costs, and the need to run a Bitcoin node, manage liquidity (even if mitigated by connecting to an LSP), monitor online time, make software updates, and ensure node security can all be time-intensive and require expertise.
For those who wish to outsource everything, using a fully managed service offers many advantages over running a Lightning node themselves, such as lower costs and less technical complexity. Wallet providers and LSPs can work together to handle all technical and liquidity-related tasks for users, providing an easy, efficient way to access the Lightning Network without the need for hardware or ongoing maintenance. For the average user, the fees can be more cost-effective than managing a node yourself, and completely eliminates the concept of channel management and liquidity.
Regardless of the outsourcing method, it generally results in faster onboarding, more reliable uptime, and better routing efficiency, making it more attractive to users who value convenience and speed. For those who occasionally run nodes and use the network, LSPs can also avoid cumbersome setups and cater specifically to those who prefer simplicity. This is likely the main group of people who want to use Bitcoin for small, everyday payments, and who do not require high resistance to censorship or asset confiscation.
VC funding in the Lightning space is healthy, but highly concentrated
Since 2021, some Lightning Network companies have received considerable venture capital funding for business expansion, but this field is mainly dominated by two companies, Strike and River. Strike received $80 million in a Series B financing in September 2022, led by Ten31, to enhance its retail and global payment solutions. After completing a $12 million Series A financing in 2021, River Financial received another $35 million in Series B financing in January 2022, consolidating its position as another major Lightning Service Provider (LSP).
Some smaller companies, such as Amboss Technologies, which focuses on data analysis for lightning payments, successfully raised $4 million for artificial intelligence research and routing optimization. These funding rounds reflect the growing confidence of investors in the potential of the lightning network.
Lightning Network user growth comes from multiple user groups
The River Lightning Report 2023 provides a detailed overview of user growth, noting that the payment volume they observed has grown by 1,212% over the past two years, a growth that reflects adoption by both individuals and businesses. Key drivers include low fees, fast settlements, and the ability to process microtransactions, particularly in industries such as gaming and cross-border payments. The report also highlights the increase in node participation (not just the presence of nodes), which improves the overall efficiency and liquidity of the network. In addition, the development of more user-friendly wallets and platforms has made the Lightning Network easier to use, further driving adoption, especially in areas with limited traditional banking infrastructure.
Businesses, especially in industries such as gaming and cross-border remittances, are taking advantage of the Lightning Network's low transaction fees and fast payment capabilities. Individuals are also beginning to use the Lightning Network for daily transactions and microtransactions due to its ease of use and scalability. In addition, users in regions with limited traditional banking infrastructure find the Lightning Network particularly valuable because it provides a fast and cost-effective alternative that enhances financial inclusion.
The report states that Lightning Network integration, such as in social media platforms (e.g., Nostr), has further fueled growth, enabling users to more easily send and receive Bitcoin around the world. This combination of commercial use cases and personal accessibility makes Lightning Network a practical solution for more and more people seeking more efficient and low-cost digital payments.
We believe that the Lightning Network is “finding itself”
The current state of the Lightning Network is not what many enthusiasts envisioned when the original paper was released in 2016. After eight years of development, it is now clear that most users — and we can see this in the wider crypto space as well — do not consider features like censorship resistance and protection against confiscation to be very important for small amounts of money. A stronger driver of adoption appears to be the unparalleled availability of payment applications based on crypto that offer clear advantages over the traditional banking system — not just the Lightning Network, but most importantly stablecoins.
This puts the future of the Lightning Network in an interesting situation. At present, it is entirely possible that the Lightning Network will evolve into a network that is mainly B2B oriented, where large Lightning Service Providers (LSPs) act as custodians for customers who use the Lightning Network for instant settlement through payment applications.
At the same time, the permissionless nature of the Lightning Network at least makes it possible for anyone to participate in the network, even if some custodians restrict access to their applications. We believe this in itself is an important safeguard against bad actors. Censorship on a commercial level is ultimately pointless if it doesn’t prevent users from using the payment system entirely.
Finally, we should consider that many Bitcoin owners are reluctant to spend their Bitcoin. Why spend your most valuable asset when there is no shortage of opportunities to earn and spend fiat currency? The ability to make small payments is not lacking almost anywhere in the world, but the ability to protect savings from inflation is scarce. Perhaps until Bitcoin reaches some kind of adoption plateau, small everyday Bitcoin payments will become popular, which means that the Lightning Network may still be ahead of its time.
Why Bitcoin needs Covenants for scalable independent custody and transactions
By: Matthew Kimmel, Digital Asset Analyst, CoinShares
Bitcoin was created to allow individuals to hold and transfer value independently without relying on a third party. Unlike previous digital cash projects, Bitcoin successfully solves the double spend problem and does not require a centralized coordinator. However, as Bitcoin adoption increases, it becomes increasingly difficult to maintain these core principles, especially in terms of cost-effectiveness, user-friendliness, and system scalability.
We believe the next step is to introduce "covenants" - modifications to the Bitcoin scripting language that dictate the rules for how Bitcoin can be used. Specifically, covenants allow Bitcoin holders to restrict recipients from spending Bitcoin to certain specific destinations.
While this may seem like a small change, enabling contracts could have a transformative impact on Bitcoin, especially when combined with the existing Bitcoin Script functionality. Contracts could enable new incentive mechanisms, enhance higher-level technology, and expand the possibilities of Bitcoin governance.
In our view, contracts are a step toward scalable peer-to-peer electronic cash by reducing the costs of independent custody and transactions. If this change fails to materialize, Bitcoin may stray from its original purpose.
Lightning Network solves some problems, but Covenants push Bitcoin scalability further
Bitcoin’s scalability issues have been well documented. As the number of users increases, transactions within the limited block space lead to longer wait times and make daily use impractical and costly.
The Lightning Network (LN) alleviates this problem by allowing users to open off-chain payment channels and provide fast, low-cost transfer services. Users only need to settle on the chain when the channel is opened and closed. However, the Lightning Network also has its limitations. Certain on-chain operations are still required, and these operations may incur higher fees, especially when transaction fees rise.
The Lightning Network has increased transaction speeds, but has yet to fully achieve Bitcoin's goal of transferring value in a decentralized manner — without relying on a third party. Holding and transferring Bitcoin still typically involves third parties, such as exchanges, wallet providers and financial products, due to cost and inconvenience.
Covenants could change this by allowing multiple users to share the same unspent transaction output (UTXO) without losing unilateral control of the funds, thereby enabling new forms of custody, cost sharing, and reducing issues that arise in high-fee environments.
From a broader perspective, the compact is a step toward making Bitcoin more suitable for everyday use while maintaining individual freedoms.
Contracts unlock new possibilities for Bitcoin’s second layer network
Many of the advantages of contracts can be achieved through higher-level technologies like the Lightning Network. Although the Lightning Network increases transfer speed and reduces costs, it still requires on-chain transactions, mainly for channel opening/closing and liquidity management.
Contracts can further extend the benefits of the Lightning Network to more users by amortizing the costs of these on-chain operations. For example, Channel Factory allows multiple users to open Lightning channels from a single unspent transaction output (UTXO), reducing the transaction burden and cost for each user.
In addition to channel factories, virtual UTXO (V-UTXO) solutions like Ark can also benefit from contracts. Although these protocols can theoretically run without contracts, the introduction of certain contracts greatly enhances the interactivity of these protocols, and contracts are essential for the actual operation of these systems.
Contracts are key to enabling self-sovereign adoption of Bitcoin
“Not your keys, not your coins” is a common Bitcoin slogan that conveys the importance of self-custody, meaning that users control their own funds without intermediaries. However, complexity and increasing costs have driven users to custodial solutions.
In order for Bitcoin to achieve global adoption and keep self-sovereign as an option, change is necessary. The Lightning Network helps, but in its current form it is almost certainly not enough to solve the problem. Without change, Bitcoin will eventually become too expensive for the average user.
Contracts address scalability issues by introducing more advanced transaction capabilities, allowing for more sophisticated fund management. The choice of which contract and how to activate it is nontrivial, but we believe the need is fairly clear. Each contract proposal is relatively simple and backwards compatible, but has strong potential for real-world use in Bitcoin transactions. Some contracts are reactivations of existing but deprecated opcodes, others introduce new opcodes or more flexible ways to construct transactions.
This is a fitting continuation of the massive Taproot and SegWit upgrades of 2021 and 2017, and the research behind this has been going on for years.
Accepting the idea of a compact can help individuals self-custody and trade Bitcoin in an affordable and secure way, on their own terms. Without the support of a compact, Bitcoin adoption will continue along the custodial path. We expect discussions of the compact to intensify by 2025, with possible activation in 2026.
Ethereum Layer 2 usage will continue to grow and show an upward trend
By Luke Nolan, Ethereum Research Assistant at CoinShares
In March of this year, Ethereum implemented the Dencun upgrade, which significantly reduced the transaction costs of Layer 2 and increased the number of transactions per second (TPS) of Layer 2 transactions back to Layer 1. These details are complex and will not be discussed in detail in this article, but you can find a detailed overview here.
The upgrade had a significant impact on the use of Layer 2. On the one hand, we can call it a huge success, as shown in this brief analysis; on the other hand, as we observe the Ethereum ecosystem, some indirect effects have also emerged, which have affected the value of Ethereum (ETH) tokens to a certain extent. So, what is the prospect of Layer 2 in the Ethereum ecosystem in the next year?
Daily transaction volume on Ethereum Layer 2 (excluding the Ethereum main chain). Source: GrowThePie, CoinShares, data available as of close 17 September 2024
Overall, Layer 2 adoption has changed significantly over the past year, especially after the Dencun upgrade, as shown on I2beat:
The horizontal axis is: token usage, one year ago, now, percentage change
Even far outpacing the current growth of Layer 2 adoption, large institutions are also moving forward with new Layer 2 development. Earlier this year, Sony announced their Layer 2 network “Soneium” and more recently, Kraken launched their “Ink” blockchain. The institutionalization of the Layer 2 will further drive adoption, bringing in users who are already customers of these enterprises over the next year.
Blob Market Dynamics
Even with this massive increase in usage, the Blob Market — the separate fee market used by Layer 2 to publish transactions to Ethereum — has remained largely “free.” The actual cost of publishing a Blob, separate from the transaction data itself, is affected by a mechanism similar to that introduced in EIP-1559. In simple terms, up to 6 blobs can be published per Ethereum block; when more than 3 blobs are published, the fee to publish them increases
