Author: David Duong, Coinbase

Compiled by: Tim, PANews

Article Overview

1. Coinbase maintains an optimistic outlook for the third quarter of 2025, although its views on altcoin season have changed. Based on current market conditions, it believes that as September approaches, the market may shift towards a full altcoin season. (A common definition of altcoin season is: at least 75% of the top 50 altcoins by market capitalization have outperformed Bitcoin over the past 90 days.)
2. Many have been debating whether a rate cut by the Federal Reserve in September would mark a peak for the crypto market. We disagree. Considering that nearly $7 trillion of retail funds remain off the market, including money market funds and other areas, we believe that the Fed's policy easing may attract more retail investors into the market in the medium term.
3. Focus on ETH. The altcoin season index from CoinMarketCap has been underperforming, showing a significant divergence from the 50% surge in total altcoin market capitalization since early July, which reflects the growing investment enthusiasm from institutional funds towards ETH. The increasing demand for digital asset funds (DAT), combined with the narrative of stablecoins and RWA, has supported this wave of market activity.
4. Tokens like ARB, ENA, LDO, and OP have consistently shown higher Beta returns compared to ETH, although only LDO leads with a 58% monthly increase. In the past, Lido provided a relatively direct channel for ETH exposure through its liquid staking features. Additionally, we believe the SEC's statement that "liquid staking tokens do not constitute securities under certain conditions" has supported LDO's appreciation.

Entering Altcoin Season

As of August 2025, Bitcoin's market share has dropped from 65% in May to about 59%, indicating that funds are beginning to shift towards altcoins. Although the total market capitalization of altcoins has surged over 50% since early July, reaching $1.4 trillion as of August 12, the CoinMarketCap altcoin season index remains in the low 40s, far below the historically defined threshold of 75 for the start of altcoin season. As we move into September, we believe current market conditions are showing signs that a full altcoin season is about to begin.

Our optimistic outlook stems from a comprehensive observation of macro-level factors and expectations of significant regulatory developments. We have previously clarified that our self-developed global M2 money supply index typically leads Bitcoin prices by 110 days, suggesting that a new wave of potential liquidity may arrive from late Q3 to early Q4 of 2025. This judgment is particularly critical, as the investment focus in the institutional capital space seems to have consistently revolved around large-cap coins. In our view, the main driving force behind the altcoin season comes from retail investors.

The current size of U.S. money market funds has reached $7.2 trillion (the highest level on record), which is noteworthy. (See Figure 2) Cash reserves decreased by $150 billion in April, which we believe drove strong performance in cryptocurrencies and risk assets in the following months. However, it is intriguing that cash reserves have rebounded by over $200 billion since June, contrasting sharply with the upward trend in cryptocurrencies during the same period. Traditionally, the price increase of cryptocurrencies often shows an inverse relationship with the size of cash reserves.

We believe that these unprecedented levels of cash reserves reflect three major market concerns: (1) increased uncertainty in traditional markets (stemming from trade conflicts and other issues); (2) overvaluation in the market; (3) ongoing concerns about economic growth. However, as the Fed's rate cuts in September and October approach, we believe the attractiveness of money market funds will begin to wane, and more capital is expected to flow into cryptocurrencies and other higher-risk asset classes.

Based on a liquidity-weighted z-score measurement model constructed from indicators including net issuance of stablecoins, spot and perpetual contract trading volumes, order book depth, and circulation, liquidity has begun to return in recent weeks, ending a previous six-month downtrend (see Figure 3). The growth of the stablecoin market is partly due to the increasing clarity of the regulatory framework.

Ethereum Beta Assets

Meanwhile, the divergence between the altcoin season index and total altcoin market capitalization primarily reflects the growing institutional appeal of Ethereum, driven mainly by demand for digital asset funds and the rise of stablecoin and RWA narratives. Bitmine alone has increased its holdings by 1.15 million ETH through newly raised funds of $20 billion, bringing its total purchasing power to $24.5 billion (while Sharplink Gaming, which previously held the largest ETH position, currently holds about 598,800 ETH).

Latest data shows that as of August 13, companies with the largest ETH reserves collectively control about 2.95 million ETH, accounting for over 2% of the total Ethereum supply (12.07 million ETH). (See Figure 4)

In terms of having a higher Beta relative to Ethereum returns, tokens like ARB, ENA, LDO, and OP are at the forefront, although recently only LDO has performed outstandingly in the Ethereum rally, with a monthly increase of 58%. In the past, Lido provided investors with a relatively direct exposure to Ethereum thanks to its liquid staking features. Currently, LDO's Beta coefficient relative to ETH is 1.5 (a Beta value greater than 1.0 means that the asset theoretically fluctuates more than the benchmark asset, potentially amplifying both gains and losses).

Additionally, we believe the SEC's statement on liquid staking released on August 5 has supported the price increase of LDO tokens. Staff from the SEC's Division of Corporate Finance clearly stated that when the services provided by liquid staking entities are primarily "transaction execution" and staking rewards are directly allocated to users in proportion through the protocol, their activities do not constitute the issuance or sale of securities. However, it should be noted that if there are guarantees of returns, self-determined re-staking, or additional reward mechanisms involved, it may still trigger a securities designation. The current guidance is only a departmental opinion, and future changes in the committee's stance or litigation rulings may alter this interpretation.

Conclusion

Our Q3 market outlook remains positive, but our judgment on the altcoin market has changed. The recent decline in Bitcoin's dominance indicates that funds are beginning to rotate into the altcoin space, rather than fully entering an altcoin season. However, as the total market capitalization of altcoins rises and the altcoin season index releases early positive signals, we believe market conditions are preparing for a rotation of funds, which may lead to a more mature altcoin market in September, supported by macroeconomic conditions and expectations of regulatory progress.

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