Market Commentary | 01.03.

The Market Commentary provides a weekly review of major issues, along with DeSpread Research's insights on key points to watch moving forward. In the January 3 edition, we examine the factors contributing to market volatility and the remarkable rise of the AI sector.

1. January: A Turning Point - Rise or Fall?

As previously covered regarding Trump, President Trump has maintained a friendly stance toward cryptocurrency policies, and many expect positive industrial development through regulatory clarity advancement and potential elimination of bitcoin capital gains tax after his inauguration.

However, there are growing concerns about increased market volatility and uncertainty ahead of President Trump's scheduled inauguration on January 20, 2025. In this article, we'll examine potential volatility-triggering events in January and analyze their causes.

1.1. Approaching Debt Ceiling Risk

On December 27, 2024, Treasury Secretary Janet Yellen sent a letter to Congress warning that the Treasury is expected to reach its debt limit between January 14-23, 2025, urging additional measures to be taken.

The U.S. debt ceiling, which sets the upper limit on government borrowing, currently stands at $31.4 trillion. However, U.S. debt has already approached approximately $36 trillion. Previously in June 2023, President Biden and House Speaker Kevin McCarthy temporarily averted a government default crisis by agreeing to suspend the debt ceiling's application until January 1, 2025.

Upon reaching the debt ceiling, the U.S. government will face difficulties requiring emergency measures such as special accounting procedures to secure funding. Related to this, on December 21, 2024, President Trump attempted to include a two-year debt ceiling suspension in the temporary budget bill during congressional deliberations, but this provision was excluded from the passed budget due to opposition from some House Republicans.

Congress must continue discussing the debt ceiling issue and needs to resolve it before June 2025, when the default crisis is expected to become more prominent. Discussions regarding the debt ceiling are expected to significantly impact both the U.S. economy and global financial markets.

1.2. Tension Between the Fed and Trump, Interest Rates, and Inflation

As mentioned in “Market Commentary | 12.21.” the Federal Reserve and Chairman Jerome Powell shocked markets with their hawkish stance. Notably, Powell indicated that they have begun considering the economic impact of Trump's policies, including major tax cuts, tariff impositions, government spending increases, and immigration enforcement, implying this shift in attitude stems from uncertainties and inflation concerns related to Trump's policies.

Meanwhile, the 10-year U.S. Treasury yield, which had fallen to 3.6% in mid-September 2024, has steadily risen since the September FOMC meeting and currently stands at approximately 4.6%. This seems to reflect the market's partial incorporation of inflation concerns, and this bond yield increase, coupled with the Fed's hawkish stance, is increasing uncertainty about future economic outlook.

Additionally, when asked whether he would resign if President Trump demanded it, Chairman Powell firmly replied "That won't happen," highlighting the potential conflict between Powell's stance on maintaining Fed independence and the Trump administration.

The January FOMC content and interest rate decision are scheduled for announcement on January 30, 2025. Market attention should focus on the impact of Trump's policy statements after his January 20 inauguration and any subsequent changes in the Fed and Chairman Powell's attitudes. These factors are expected to increase market uncertainty and become important variables for cryptocurrency industry investors.

Beyond the above events, concerns are growing about potential yen carry trade liquidity reduction following the Bank of Japan's interest rate decision scheduled for January 24. Additionally, there are widespread market concerns about the depletion risk of reverse repo funds, which have been a major stimulus for the U.S. economy, and patterns of U.S. economic recession that have repeatedly appeared following the normalization of the yield curve spread.

Uncertainty is increasing as various factors intertwine ahead of President Trump's inauguration. While predicting market direction in this situation is difficult, the likelihood of significant volatility during January appears very high. Careful observation of these variables and prudent response measures appear necessary.

2. Solo Leveling AI Sector

According to Cookie.fun, an AI agent data platform, the total market capitalization of AI-related cryptocurrencies surged by 82.3% within a week, rising from approximately $10.24B on December 26, 2024, to $18.64B on January 2, 2025. During the same period, Bitcoin's price declined by 0.32%, and the market capitalization of cryptocurrencies excluding Bitcoin and Ethereum (Total3) increased by 4.22%. Despite the overall market remaining relatively flat, the AI sector has stood out with remarkable growth.

The chart above illustrates the market capitalization trends of the top 10 AI-related cryptocurrencies over the past week (from December 26, 2024, to January 2, 2025). Leading the AI agent narrative are Virtual Protocol and AI16Z, with market capitalizations surpassing $4.5B and $2.5B, respectively. Notably, Virtual Protocol has demonstrated exceptional performance not only through its native token, $VIRTUAL, but also with a diverse ecosystem of tokens based on its platform, such as $AIXBT, $GAME, and $VADER.

The dominance of AI is also evident in terms of mindshare—a metric that reflects the relative level of interest from market participants. According to Kaito.ai, a social media data platform, AI's mindshare has been steadily rising since November 9, surpassing its previous peak of approximately 37% during the $GOAT craze, and currently stands at 51.35%. This indicates that over half of all cryptocurrency-related posts on social media platforms like Twitter are now focused on AI.

Fueled by the AI boom, the Base and Solana ecosystems have also seen continuous capital inflows. Between December 1, 2024, and January 2, 2025, Base recorded daily inflows of up to $81.7 million, while Solana saw inflows of $27.8M. Over this period, they achieved net inflows of $1.05B and $380.52M, respectively, securing the top two positions in the overall ecosystem rankings by a significant margin.

The AI sector has demonstrated remarkable performance across both qualitative and quantitative metrics, solidifying its position as a driving force in the blockchain market. However, as mentioned in Chapter 1, the increasing uncertainty in asset markets surrounding Trump's inauguration calls for cautious evaluation of whether the upward trajectory of the AI sector can be sustained.

As of January 3, the AI sector is experiencing a slight correction. It remains to be seen whether this adjustment signals a liquidity rotation toward other sectors—such as static memes, RWA, or DeFi—that have been relatively overshadowed by AI, or if AI will continue to dominate market attention and capital following this period of consolidation.