Q1 2025 Review of the Encryption Industry: Coexistence of Macroeconomic Fluctuations and Micro Innovations

encryption industry Q1 2025 review

In early 2025, the encryption market begins a new chapter amidst complex emotions. Despite the industry's high hopes for the new year, including a shift in Federal Reserve policy, a resurgence of AI technology, and the new government's commitment to a friendly regulatory framework, the first quarter shows a trend of "severe macro volatility and hidden micro innovations."

The global economic situation has become a key factor driving the market. The Federal Reserve is struggling to balance between repeated inflation and the risk of recession. The unexpected expectations of a recession-related interest rate cut in March briefly boosted market sentiment, but failed to offset the liquidity concerns triggered by the adjustment of U.S. stock valuations. The new government is promoting a national strategy reserve for Bitcoin and digital asset reserves, and is implementing relevant regulatory legislation, bringing structural benefits to the industry. However, the simultaneous occurrence of policy dividends and regulatory relaxation has intensified market debates over the costs of transformation.

After Bitcoin broke through the historical high of $100,000 in January, it experienced a 30% correction, revealing that the market has taken profits from the "halving narrative." The overall performance of the altcoin market has been mediocre, but the launch of innovative products such as RWA and user entry points has injected new momentum into the industry. Notably, mainstream exchanges are accelerating their layout in the decentralized ecosystem, achieving seamless access for users to DeFi and other application scenarios through on-chain liquidity aggregation and account abstraction technology, and for the first time allowing centralized exchange users to directly trade decentralized assets. This model of integrating centralization and decentralization may become a key pivot for the next round of growth.

Economic environment and its impact

In the first quarter of 2025, U.S. economic data has a profound impact on the encryption market. Since the approval of the Bitcoin ETF, the correlation between the encryption market and U.S. stocks has significantly increased, with the Nasdaq's performance largely determining the direction of cryptocurrencies. Although Bitcoin was once seen as "digital gold," it is currently more inclined to be a risk asset, influenced more by market liquidity.

The core of the economy lies in the balance between inflation and growth. If inflation is too high or the economy is overheating, it may delay interest rate cuts, which is detrimental to the capital market; on the other hand, if the economy is too weak, it may trigger recession risks, which is also detrimental to market confidence. Therefore, the economy needs to find a balance between strength and weakness in order to provide a favorable environment for the capital market.

The new government has significantly reduced the number of personnel in government agencies, directly leading to an increase in the unemployment rate. At the same time, tariff policies have driven up the prices of goods and the costs of services, exacerbating inflationary pressures and increasing the risk of economic recession. These policies have added instability to the market, resulting in increased volatility in the capital markets. Considering the gains from the previous election and the potential risks of a correction, some investment institutions have scaled back their investment plans in the first quarter and are exploring other business strategies.

However, these policies may not only be economic control measures but may also be intended to increase leverage in international negotiations or deliberately create chaos to achieve specific purposes. For example, by creating signs of economic recession to pressure the Federal Reserve to cut interest rates, thereby alleviating the national debt issue and stimulating economic growth. Therefore, the market remains optimistic about the long-term prospects of encryption.

The encryption market is sensitive to economic data. The overall data for January was strong, but the market reacted lukewarmly. February's inflation exceeded expectations, leading to a sharp drop in interest rate cut expectations, resulting in a significant decline in Bitcoin. The improvement in March data triggered a brief rebound, but the core PCE exceeding expectations once again caused a pullback. In the future, the trend of the encryption market will still heavily depend on economic data and monetary policy direction, and investors need to closely monitor changes in inflation and employment data.

New Government Encryption Policies and Impacts

The new government signed an executive order in March to establish a strategic Bitcoin reserve, with funds primarily coming from approximately 200,000 confiscated Bitcoins (worth about $18 billion), and prohibits the sale of the reserve Bitcoins. This move aims to elevate Bitcoin to a "sovereign reserve asset," enhancing its legitimacy and liquidity. Although the price of Bitcoin surged in the short term, it subsequently fell back, which may lead other countries to follow suit in the long term, promoting Bitcoin as an international reserve asset.

In terms of regulation, the new government has replaced the SEC chairman, established a working group on encryption assets, clarified token classification standards, and terminated lawsuits against certain companies. At the same time, controversial accounting standards have been abolished, reducing the burden on companies. The regulatory environment has significantly loosened, attracting institutional investors to enter the market; traditional financial institutions are permitted to conduct encryption custody services, promoting industry compliance. In the short term, policy dividends may accelerate innovation and capital inflow; in the long term, it is necessary to be aware of systemic risks and global regulatory games.

In terms of stablecoins, the new government has established a federal regulatory framework that allows stablecoin issuers to connect to the Federal Reserve payment system and explicitly prohibits the issuance of central bank digital currencies to maintain the innovation space for private encryption. The application of stablecoins in cross-border payments has accelerated, expanding the path for the internationalization of the dollar; the market share of private stablecoins has increased, and the integration with the traditional financial system has deepened.

Regarding tariff policies, the new government signed the "Memorandum on Reciprocal Trade and Tariffs", requiring trade partners to align their tariffs with those of the United States, and imposing tariffs on countries that implement value-added tax. Subsequently, an executive order on reciprocal tariffs was signed, triggering countermeasures from major countries. This has led to an increase in global trade costs, accelerated supply chain restructuring, and a decline in corporate investment willingness, while the United States faces inflationary pressures from imports. The Federal Reserve's monetary policy is caught in a dilemma, with rate cut expectations being postponed. Tariff policies have also forced companies to relocate production to other countries, but domestic infrastructure and labor shortages in the United States hinder the return of manufacturing.

The new government's encryption policy boosts market confidence and attracts capital in the short term, but in the long run, it is necessary to be vigilant against the risks of computing power centralization and policy reversals. Although the tariff policy is named "national priority," it leads to the fragmentation of the global trade system, increases inflation, and exacerbates expectations of economic recession, forcing funds to flow from risk assets to safe-haven assets. This highlights the contradictions and games between the United States in the transition of the digital economy and the real economy.

Integration of Centralized and Decentralized Exchanges

Exchanges and Web3 wallets serve as important entry points into the encryption world. Users typically complete fiat deposits and cryptocurrency transactions on mainstream exchanges first, or interact with dApps through Web3 wallets. In the past, the boundaries between the two were clear. Due to the high entry threshold of Web3 wallets, ordinary users often start their Web3 journey from exchanges, which retain users through more mature services. By 2025, exchange businesses will be more mature, with the number of users on a large exchange reaching 200 million, while the on-chain daily active users will only be about 10% of that of the exchange.

Since 2023, the exchange has entered the Web3 wallet market with its asset management experience. A certain exchange's wallet has attracted a large number of users due to its excellent product experience. The exchange leverages its own advantages to create a more complete wallet product, achieving user attraction and retention. However, these wallets are essentially not much different from traditional Web3 wallets and have not broken the usage threshold.

Another exchange's Web3 wallet is closely integrated with the exchange account, supporting quick interoperability between on-site assets and the Web3 wallet, reducing security concerns. This wallet also collaborates with DEX within the ecosystem to launch IDOs aimed at ordinary users, attracting more users to participate in on-chain activities. The latest feature allows on-site users to directly purchase on-chain assets, breaking the traditional boundaries between CEX and DEX.

Native encryption projects focus on the actual needs of on-chain users in the wallet space. A certain project, leveraging MPC and account abstraction technology, launched a product that integrates a wallet and trading platform, solving the challenges of multi-chain asset transfer and trading, gaining market recognition.

The fusion of CEX and DEX is not only a technological innovation but also marks the shift of the encryption market from "opposition and fragmentation" to "cooperative coexistence". This transformation brings new challenges in regulation, security, and governance while improving efficiency and inclusiveness. In the future, participants who can better balance the efficiency of centralization with the security and autonomy of decentralization will dominate the evolution of the next generation of financial infrastructure.