Author: Jeff Dorman

Translated by: Tim, PANews

I think this is probably what is referred to as the bottom of the risk spectrum

In the past eight weeks, the crypto market has been in a downtrend for seven weeks. Although there was a brief rebound during Thanksgiving, it plummeted again on Sunday night as the Japanese market opened (Nikkei index fell, and yen bond yields rose).

After experiencing system failures at exchanges like Binance in early October (three weeks before the Federal Reserve meeting), the crypto market began its first round of decline. However, the general consensus attributes the major downturn in November to the hawkish remarks of Federal Reserve Chairman Jerome Powell. Throughout November, the market's expectations for a rate cut in December plummeted from nearly 100% to a low of 30%, leading both the stock and crypto markets to decline throughout the month.

However, a noteworthy change occurred in the last week of November. The core PPI inflation rate dropped to 2.6%, below the expected 2.7%, and the limited labor data released after the government shutdown indicated that while the job market had not collapsed, it was slowing down. Market expectations for a rate cut in December quickly rebounded to nearly 90%, leading to a strong rebound in U.S. stocks, which pushed the entire market to turn positive by the end of November. Additionally, Trump hinted that he had a candidate in mind for the next Federal Reserve chair, predicting that the market had largely digested the expectation of Kevin Hassett taking over. Hassett, known for supporting the Trump administration's push for faster rate cuts, is recognized as a macro bull.

Source: CME FedWatch

So the question arises: why do crypto assets plummet in response to bad news but struggle to rebound in the face of good news?

I don't know.

While we have experienced similar phases in the past, where everything was ready except for price increases (for example, in May and June 2021 and April 2025), this situation is entirely different.

Currently, most crypto assets seem to be ignored, but no one can precisely explain the underlying reasons, which is completely different from previous years. Typically, whether we anticipate a major drop or are caught off guard, we can at least analyze the motivations through discussions with hedge funds, exchanges, brokers, and KOLs. However, so far, this round of sell-off appears to lack any logical basis.

Recently, Wall Street mogul Bill Ackman mentioned that his investments in Fannie Mae and Freddie Mac were affected due to their association with the crypto market. While this is difficult to understand from a fundamental perspective, given the vastly different nature and investment logic of the two asset classes, it becomes clearer when considering the current integration of traditional finance, retail investors, and crypto investors. This once relatively isolated industry has now intersected with all fields. In the long run, this is undoubtedly a good thing (it is unreasonable for there to be completely isolated sectors in finance), but in the short term, it has caused serious issues, as crypto assets seem to be the first to be reduced in any diversified investment portfolio.

Moreover, this also helps explain why participants in the crypto industry find it difficult to pinpoint the source of the sell-off: it likely does not originate from within the industry. The crypto world is almost transparently distorted, while traditional finance still resembles a black box, and it is this black box that currently dominates the flow of market funds.

Various Reasons for the Weakness in the Crypto Market

In addition to the obvious reasons (lack of investor education and a large number of bad assets), there should be more reasonable explanations for why the crypto market has fallen into such a downward spiral.

We have long believed that assets must possess some or all attributes of financial value, practical value, and social value to have actual value. The biggest problem with most crypto assets is that their value primarily derives from social value, which is the most difficult of the three values to quantify. In fact, in an analysis report earlier this year, when we conducted a sum-of-parts valuation analysis of L1 tokens (such as ETH and SOL), we found that after calculating negligible financial and practical values, we had to backtrack to assess the highest proportion of social value.

Therefore, when market sentiment hits rock bottom, tokens that primarily rely on social value for support should experience a sharp decline (and indeed most have, think of Bitcoin, L1 tokens, NFTs, and meme tokens). Conversely, assets with a higher proportion of financial attributes and practical value should perform better; while some tokens do (like BNB), most have not outperformed (such as DeFi tokens and PUMP). This phenomenon does seem somewhat abnormal.

Logically, there should be someone stepping in to support the market, but this has not occurred. In fact, we see more investors increasing their short positions in response to the downturn, expecting the market to weaken further, even if this judgment is based solely on trends and technical analysis without substantial evidence. However, friends from the well-known crypto venture capital firm Dragonfly have stepped in to defend the valuation of L1 tokens. They published a rigorously argued article that was at least indirectly inspired by our sum-of-parts valuation analysis of L1 tokens. (Related article: Dragonfly Partner's Long Article: Reject Cynicism, Embrace Index Thinking)

Dragonfly essentially agrees with the last two paragraphs of the article, stating that the current revenue and practical value-based valuation model is not applicable because all global assets will eventually run on the blockchain. While this does not mean that individual L1 tokens are undervalued, it does indicate that the overall total value of all blockchains is indeed low, and investing in any L1 token is essentially a bet on its probability of success. Essentially, we must view the future direction of the industry from a broader perspective, rather than being limited to current application scenarios. This viewpoint is indeed incisive. If prices continue to fall, we can expect to see more of these "defensive" analysis articles published.

Of course, without articles criticizing Strategy (MSTR) and Tether, this wave of crypto sell-off would seem incomplete. Although we have clarified all controversies surrounding Strategy multiple times (they will never become forced sellers), FUD continues to pour in. The panic surrounding Tether is even more timely; for some unknown reason, public opinion has rapidly shifted from "Tether raises $20 billion at a $500 billion valuation" to "Tether is on the brink of bankruptcy" in just a few weeks.

Recently, S&P downgraded Tether's credit rating to junk status, while Tether's latest attestation report (as of September 30, 2025) shows that 70% of its dollar stablecoin reserves consist of cash and cash equivalents, with the remaining 30% supported by gold, Bitcoin, corporate loans, and equity buffer funds.

Source: Tether

I believe S&P's actions have indeed caused panic in the market, but for a privately held company with unregulated asset allocation, such a reserve structure is actually completely expected. Moreover, a model that is almost entirely supported by cash-like assets is clearly much more stable than the operation of the entire fractional reserve banking system. However, until the GENIUS Act comes into effect, I will refrain from directly comparing USDT with the banking system.

It should be noted that it is fundamentally impossible for over 70% of USDT to be redeemed overnight, and only such a situation would trigger a liquidity crisis, so all doubts about its liquidity are absurd. However, solvency issues are another matter. If its 30% in Bitcoin, gold, and loan investments incur losses, Tether would have to tap into other assets held by the parent company that are not explicitly designated as reserves for USDT. Considering the parent company's astonishing profitability, this does not pose a substantial problem, and rational investors would not view it as a hidden risk. Nevertheless, even so, Tether CEO Paolo Ardoino still had to personally address the concerns.

In fact, USDT has never shown any signs of de-pegging, which again confirms the absurdity of the crisis theory, but perhaps market anxiety does exist? I think the only thing worth pondering is: since it is known that the market only wants it to hold cash and cash equivalents, and that simply relying on government interest (with $180 billion in assets generating over $5 billion in annual profit at a 3-4% interest rate) can yield substantial profits, why does Tether still venture into other investment areas?

Therefore, looking back, we can at least attempt to find explanations for part of the market's decline. However, this ongoing weakness is indeed perplexing.

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