A Comprehensive Review of the Crypto Market from Macro Environment to Vertical Tracks in the Second Half of 2024

1. Market Overview

I.1 Crypto Market Fundamentals

Since the first half of 2024, the total market capitalization of the crypto market has increased from $2.31 trillion to $3.33 trillion, a growth of 44.2%. This growth is attributed to several key milestones, including the approval of spot Bitcoin ETFs in the first half of 2024, and Trump's overwhelming victory in the second half of the year, which injected optimism into the industry with his deregulation and pro-encryption policies. Bitcoin's dominance rose from 53.4% to 56.8%, mainly due to the doubling of the asset management scale of Bitcoin ETFs, reflecting increased interest from institutional investors.

Despite the launch of the Ethereum ETF in the second half of 2024, its performance has been relatively flat, and institutional investors' preference for Bitcoin remains evident, as seen from the continuously declining ETH/BTC ratio.

Solana has performed remarkably, with the price of SOL rising by 29.3% since the first half of 2024. In addition to the price increase, the Solana ecosystem has seen a net inflow of $2 billion in 2024.

In 2024, the share of the DeFi market further expanded, with the total value locked (TVL) growing more than twice since the beginning of the year. The ratio of DEX/CEX trading volume increased from 9.37% at the beginning of the year to 11.05% by the end of the year, with overall trading volume significantly increasing, reaching an annual trading volume of $2.67 trillion. A more simplified listing process has also encouraged more projects to shift towards DEX-dominant strategies, thereby supporting a wider variety of long-tail asset trading. Notably, the DeFi TVL market shares of Solana and Base more than doubled in 2024, reaching 7.17% and 3%, respectively.

The adoption of stablecoins has accelerated significantly, with a market cap growth of 26.8% from 1H 2024, reaching a historical high of over $205 billion. New entrants like Ethena have further boosted this trend with competitive yields. Looking ahead, the potential approval of ETFs for other institution-preferred assets such as XRP and SOL is expected to bring positive catalysts to the market.

I.2 Macro Environment and Politics

Politics

In the November 2024 U.S. election, Trump defeats Harris to be re-elected as president, and the Republican Party wins a majority in both houses. Trump's America First and isolationist policies may bring uncertainty to the international situation, with countries possibly following the U.S. in starting trade protectionism and regionalizing economic trade. During his campaign, Trump was friendly towards the encryption market, stating that he would allow self-custody wallets, vigorously develop U.S. dollar stablecoins, choose crypto-friendly economic officials, and consider designating BTC as a reserve asset for the U.S. Treasury, but whether he can truly promote the development of the crypto market will depend on the actual policies after taking office.

Europe is primarily affected by the Russia-Ukraine war, which seems to have turned into a protracted conflict that may last for a long time, leading to rising energy prices in Europe and increased military spending by various countries. The discourse power of right-wing parties in European countries has significantly strengthened. Influenced by the United States, limiting illegal immigration and economic isolation are also major issues for European countries. Europe's policies in the crypto market are more in a following state, with the regulation of the crypto asset market (MiCA) officially implemented at the end of 2024, clarifying the regulatory framework for stablecoins and cryptocurrency entities, while countries maintain strict scrutiny over crypto tax regulations.

Other Regional Geopolitics

The Middle East is engulfed in ongoing conflicts, with the Israel-Hamas clash entering its concluding phase. Iran and Lebanon have also experienced friction with Israel, leading to armed conflicts, while the Syrian civil war has resulted in the downfall of the Assad regime. Argentina's Milei has taken office and initiated extensive reforms, eliminating numerous government departments and dollarizing the currency, achieving certain results, and reducing the overall inflation rate. Many countries and regions in South America are proponents of Bitcoin, with Argentina, Brazil, El Salvador, and others advancing legislation to allow for the legal regulation and circulation of crypto.

Economy

In 2024, the global overall GDP growth rate is projected to be 2.6%, with an inflation rate of 2.5%. The economy is emerging from the recession period caused by COVID-19 and recovering to pre-pandemic growth levels. The United States has partially controlled inflation after a two-year interest rate hike cycle, beginning a series of three consecutive rate cuts of 25bps starting in September 2024, and inflation seems to be under control, with the economy moving towards a stable landing. The Eurozone is more affected by geopolitical conflicts, with soaring energy prices, and the European Central Bank has been forced to raise rates in response to the Federal Reserve's high rates, leading to sluggish economic growth. China and emerging market countries continue to maintain relatively high growth rates but face significant challenges. China is in a deflationary state due to sluggish domestic consumption and export resistance, facing high unemployment rates and difficulties for businesses, alongside a bursting real estate bubble resulting in substantial related debt and bad debt risks. Emerging market countries are experiencing severe depreciation of their local currencies due to the impact of the US dollar interest rate hikes.

Looking at the development of the US economy in 2024, it remains in a leading position in the world. All three major indices have risen sharply, with the Nasdaq, primarily composed of technology companies, rising over 28%, and the S&P 500 up 15.2%. In an environment of extreme funding tightness, technology companies still demonstrate astonishing growth potential. AI technology companies, represented by Nvidia, have shown the most remarkable performance. The development of AI has also lived up to investors' expectations, with AI large models represented by ChatGPT disrupting multiple fields such as professions, education, and artistic creation, significantly enhancing output efficiency. With the continuous improvement of computing power, AI will further expand its practical applications in more fields.

Another standout performance in the rankings is the Nikkei index. Due to the global interest rate hike cycle and the yen maintaining a 0% interest rate, international investors have flocked to the Japanese stock market for carry trade, driving up the Japanese stock market and causing the yen to depreciate. The capital's favor and the yen's depreciation brought advantages in export trade, enhancing the profitability of Japanese companies, allowing the Japanese stock market to finally reach a new high after more than 30 years since the bubble burst.

2. Bitcoin

2.1 Product and Protocol Design

In the second half of 2024, Bitcoin will have some important software upgrades, such as Bitcoin Core 28.0 introducing flexible transaction forwarding strategies and BOLT12 for the Lightning Network. These client upgrades may affect various application scenarios. For example, the implementation of V3 transactions in Bitcoin Core now supports zero-fee transaction forwarding, which may influence the development of MEV-related business models adopted by mining pools.

Discussions about the design of the Bitcoin protocol layer are ongoing, mainly focusing on soft fork proposals. There are divisions among developers, which can be categorized into several camps: one group proposes to add new opcodes such as OP_CTV and OP_CAT to implement restrictions or other more flexible functions; another group is LNHANCE, which introduces a toolkit to improve the lightning network; and some developers are advocating for the so-called "big script recovery movement".

There has not yet been a consensus reached in these discussions. Some discussions focus on whether certain upgrades are too heavily weighted towards specific areas and lack diversity, while another part of the discussion concerns whether some proposals are too flexible, possibly leading to unintended uses and unforeseen risks. At the same time, some developers advocate that consensus cleaning should be prioritized over simply pursuing functional upgrades.

It is foreseeable that there will still be many intense discussions and controversies during the soft fork activation process in the future. By 2025, we expect to see some form of consensus and development.

The BitVM implementation that has been widely discussed is still progressing steadily. Currently, the focus remains on the design and implementation of cross-chain bridges. Recently, some test versions of cross-chain bridges based on BitVM have begun to run, such as BitLayer.

2.2 Layer 2 - Lightning Network

The number of publicly accessible Lightning Network channels has not changed much, maintaining a total of around 5000 BTC. The number of nodes is basically stable, but the number of channels continues to decrease. This may indicate that the liquidity of the Lightning Network is gradually concentrating in the hands of some large node service providers, or that some early channels have been closed due to security patch updates.

However, the protocol and application ecosystem of the Lightning Network continues to evolve. For example, BOLT12 (offer) has been adopted by numerous clients, supporting static payment methods and enhancing user experience.

In addition, some Layer 1 networks are actively developing Layer 2 solutions that comply with the BOLT specification to achieve compatibility and interoperability with the Lightning Network.

In this field, the main focus remains on assessing the feasibility of business models. Since token issuance is generally not used as a means of fundraising or integrating into business operations, investment and financing decisions must pay more attention to project performance indicators, such as the number of users and asset size.

As the payment sector receives increasing attention, the ability of the Lightning Network to support payment services makes it a promising solution for widespread adoption. Service-oriented projects, especially those utilizing the Lightning Network as a settlement layer for cross-border transactions, may receive more attention. Service-oriented projects that provide the Lightning Network as a settlement layer for cross-border, peer-to-peer (P2P), and business-to-business (B2B) transactions are expected to gain more attention and development momentum. The future development in this area depends on the issuance of stablecoins on the Lightning Network, with possible implementations including RGB and Taproot Assets mentioned below.

2.3 Layer 2 - Side Chains

Layer 2 sidechains show varying performance. Some projects have declined since their peak, while others continue to grow. The TVL of different Layer 2 projects also exhibits a clear alternating trend.

The challenges faced by Bitcoin Layer 2 (L2) and BTCFi are multifaceted, with a key issue being the reliance on unsustainable TVL surges and airdrop incentives. Although attempts have been made to incentivize TVL using points, the critical factor remains building a robust ecosystem to ensure lasting liquidity. The main driver for Bitcoin deposits in L2 solutions lies in obtaining Bitcoin-denominated, low-risk return opportunities. However, in terms of portfolio composition, BTCFi can achieve better liquidity abstraction and protocol layer stacking by leveraging existing infrastructure. If Bitcoin L2 can focus on constructing an ecosystem around enhancing BTCFi utility rather than simply replicating EVM chains, there is still significant growth potential.

Therefore, to summarize, the key to the success of Bitcoin L2 lies in: 1) ensuring asset security (whether through third-party custody or self-custody); and 2) pursuing a vertical integration strategy (which will better serve BTCFi).

2.4 On-chain Assets

On-chain assets of Bitcoin can generally be divided into two categories: meta-protocols and CSV (Client-Side Validation). However, overall, these assets have not shown significant appreciation in value with the rise in Bitcoin prices, and their activity is relatively low. Overall, on-chain altcoins of Bitcoin have also not outperformed other altcoins.

BRC20, Runes

BRC20, Runes, and other meta-protocol assets have recently performed poorly. Their market capitalization and growth are far behind many popular Meme assets this year, confirming that such assets have a short lifecycle and cyclical characteristics in the absence of strong utility. These easily replaceable tokens are now being supplanted by newer Meme and AI agent narratives.

RGB

As one of the earliest CSV protocols, RGB is still being promoted recently. There are already some technical implementations that can support integration with the Lightning Network. The RGB narrative mostly revolves around the issuance of Tether stablecoins, but the specific implementation plan is still unclear.