Recursive improvement of the cryptocurrency market in 2025: the triangle of institutional capital, on-chain infrastructure, and regulatory normalization

The crypto market has reached a fundamental turning point in 2025. This shift is not merely a rise in prices or temporary policy changes, but a simultaneous recursive improvement in the nature of capital, the structure of assets, and the clarity of rules. Capital is moving from individuals to institutions, assets are evolving from narratives to on-chain dollar systems, and regulation is transitioning from uncertainty to normalized frameworks. These three changes are fundamentally reshaping crypto from “high-volatility speculative assets” into a “modelable financial infrastructure.”

Recursive Improvement Starting with Institutional Limit Buyers

In the early stages of the crypto market, price movements were driven almost entirely by retail investors, short-term speculative capital, and community sentiment. The market was highly sensitive to social media hype, narrative shifts, and on-chain activity metrics—summarized as “community beta.” Within this framework, asset price increases were fueled not by fundamental improvements but by rapid accumulation of FOMO-driven sentiment, and when expectations reversed, panic selling spread quickly without support from long-term capital.

However, from 2024 to 2025, this long-standing structure underwent a fundamental shift. The approval and successful operation of a U.S. spot Bitcoin ETF provided a legitimate pathway for large-scale institutional capital to systematically deploy into crypto assets for the first time. Unlike trusts, futures, or on-chain custody, ETFs are standardized, transparent, and legal structures that significantly reduce operational and regulatory costs for institutions entering the space.

By 2025, institutional funds no longer merely “test” crypto assets periodically but continuously absorb positions through ETFs, regulated custody solutions, and asset management products, evolving into market limit buyers. The core of this change is not the size of the capital but the nature of the capital. The source of new demand has shifted from emotion-driven retail investors to institutions whose core logic revolves around asset allocation and risk budgeting. When the limit buyer changes, the market’s price discovery mechanism is also reconfigured.

Institutional capital is characterized by lower trading frequency and longer holding periods. Unlike retail traders who trade frequently based on short-term price swings and sentiment signals, decisions by pension funds, sovereign funds, family offices, and large hedge funds are based on mid- to long-term portfolio performance, requiring discussions in investment committees, risk management reviews, and regulatory assessments. These decision mechanisms inherently suppress impulsive trading, and position adjustments tend to be gradual rebalancing rather than emotional chasing.

As the proportion of institutional funds steadily increases, the share of high-frequency short-term trading in market structure declines, and price trends begin to reflect capital allocation directions more than immediate sentiment shifts. This change directly manifests in volatility structures, especially in deep-liquid core assets like Bitcoin and Ethereum. The market exhibits a more “static order” reminiscent of traditional assets, with price movements less dependent on narrative jumps and more underpinned by capital constraints.

Another key feature of institutional capital is high sensitivity to macro variables. The primary goal of institutional investment is risk-adjusted return maximization, not absolute returns. Asset allocation behavior is deeply influenced by macroeconomic conditions. Interest rates, liquidity tightening, risk appetite shifts, and cross-asset arbitrage conditions become critical inputs for position adjustments. When major central banks like the Federal Reserve adjust policy rates, institutional crypto allocations are reevaluated. The underlying logic is not narrative trust but the recalculation of opportunity costs and portfolio risk.

In summary, the process of 2025 where institutions become the limit buyers signifies that crypto is transitioning from “narrative-driven, emotion-based pricing” to “liquidity-driven, macro-driven pricing.” This is the first layer of recursive improvement in the crypto market, laying the foundation for subsequent layers.

Stablecoins and RWA: Recursive Completion of the On-Chain Dollar System

If the large-scale entry of institutional funds in 2025 answers the question “Who is buying crypto assets,” then the maturation of stablecoins and real-world asset tokens (RWA) provides the answer to the fundamental questions of “What to buy, how to pay, and where do returns come from.” The crypto market has made a significant leap in 2025 from the “crypto primitive financial experiment” to the “on-chain dollar financial system.”

Stablecoins have evolved beyond mere trading intermediaries or safe havens into the foundational payment and pricing layer of the entire on-chain economy. In centralized exchanges, decentralized protocols, RWA, derivatives, and payment scenes, stablecoins form the backbone of capital flows. On-chain volume data shows that stablecoins have become an important extension of the global dollar system, with annual on-chain transaction volumes reaching tens of trillions of dollars—far exceeding most single-country payment systems. This indicates that by 2025, blockchain has taken on the role of a truly “functional dollar network” for the first time.

More importantly, widespread adoption of stablecoins has transformed the risk structure of on-chain finance. Once stablecoins became the fundamental unit of pricing, market participants could perform trading, lending, and asset allocation without direct exposure to crypto price volatility, greatly lowering participation barriers. This is especially critical for institutional capital, which generally does not seek high volatility returns but prefers predictable cash flows and risk-controlled income sources.

The maturation of stablecoins has enabled institutions to gain “dollar price” exposure on-chain without taking on traditional crypto price risk. Based on this foundation, large-scale on-chain real-world assets, especially on-chain U.S. Treasuries, have begun to be directly introduced in a manner closer to traditional financial asset issuance. Unlike early “synthetic assets” or “income mapping” attempts, 2025 RWA projects are increasingly bringing real-world low-risk assets directly on-chain, resembling traditional financial issuance.

On-chain U.S. Treasuries are no longer just conceptual narratives but exist in auditable, traceable, and composable forms. Their cash flow sources are clear, maturities are well-defined, and they are directly linked to the risk-free rate curve of traditional finance. This marks the recursive completion of the on-chain dollar system.

However, as stablecoins and RWAs expand rapidly, 2025 also exposes another aspect of the on-chain dollar system: potential systemic vulnerabilities. Several collapses and failures in yield-bearing and algorithmic stablecoins have sounded alarms. These failures reflect structural issues such as implicit leverage from recursive collateralization, lack of transparency in collateral, and high concentration of risk in a few protocols.

As stablecoins pursue higher yields through complex DeFi strategies, their stability depends not on the assets themselves but on implicit assumptions about market prosperity. When these assumptions break, the fallout can lead to systemic shocks rather than technical glitches. Events in 2025 demonstrate that the risk of stablecoins is not whether they are “stable,” but whether their stability sources can be clearly identified and audited.

Looking ahead to 2026, the key question is not whether stablecoins and RWAs will continue to grow, as the expansion of the on-chain dollar system is nearly irreversible. The more critical question is about “quality differentiation.” Differences in collateral transparency, maturity structures, risk separation, and regulatory compliance among stablecoins will directly impact capital costs and usage scenarios. Similarly, differences in legal structures, settlement mechanisms, and income stability of RWA products will influence their suitability for institutional asset allocation.

The on-chain dollar system will increasingly form a layered hierarchy rather than a homogeneous market. Products with high transparency, low risk, and strong regulation will enjoy lower capital costs and broader adoption, while complex strategies and implicit leverage products will become marginalized or phased out. This constitutes the second layer of recursive improvement in on-chain infrastructure.

Regulatory Normalization Driving Recursive Industry Improvement

By 2025, global crypto regulation has entered a normalization phase, reflecting a fundamental shift in the “survival hypothesis” of the entire industry, not just specific laws or regulatory events. Over the past few years, the crypto market operated in a highly uncertain regulatory environment, where the core question was not growth or efficiency but whether “this industry can survive.”

Regulatory uncertainty was regarded as systemic risk, often requiring additional risk premiums for capital entry to account for potential shocks, enforcement risks, and policy reversals. By 2025, this long-standing issue has begun to be addressed gradually. Major jurisdictions in Europe and Asia-Pacific have successively established relatively clear and enforceable regulatory frameworks, shifting market focus from “Can it exist?” to “Can it scale under compliant conditions?” These changes have profoundly impacted capital behavior, business models, and asset pricing.

Clearer regulation has significantly lowered institutional barriers to entering the crypto market. For institutional capital, uncertainty itself is a cost, and regulatory ambiguity often implies tail risks that are difficult to quantify. As key stages like stablecoins, ETFs, custody, and trading platforms become increasingly covered by clear regulations, institutions can finally evaluate risks and returns within existing regulatory and risk management frameworks. This shift does not mean deregulation but increased predictability. Predictability itself becomes a prerequisite for large-scale capital inflows.

As regulatory boundaries become clearer, institutions can incorporate these constraints into internal processes, legal structures, and risk models, reducing the need to treat them as “uncontrollable variables.” Consequently, more long-term capital begins to systematically enter the market, increasing depth and deployment scale, gradually integrating crypto assets into broader asset allocation systems.

More importantly, regulatory normalization has altered the competitive logic at the corporate and protocol levels. The profound impact of regulation normalization lies in the reorganization of industry structure. As regulatory requirements are gradually realized across issuance, trading, custody, and settlement stages, the crypto industry has begun to trend toward greater concentration and platformization.

More products are issued and distributed on regulated platforms, and trading activity concentrates in licensed, regulated venues. Token issuance evolves from chaotic P2P sales toward more structured, standardized processes akin to traditional capital markets, forming a new “internet capital market” paradigm. Within this system, issuance, disclosure, lock-up periods, distribution, and secondary market liquidity are more tightly integrated, leading to more stable risk and return expectations among market participants.

These industry structural changes directly influence asset valuation methods. Previously, crypto asset valuation heavily relied on narrative strength, user growth, and TVL metrics. From 2026 onward, as regulation becomes a quantifiable constraint, valuation models will incorporate new variables such as regulatory capital occupancy, compliance costs, legal structure stability, reserve transparency, and access to regulatory distribution channels.

Markets will start assigning “institutional premiums” or “institutional discounts” to different projects and platforms. Entities operating efficiently within regulatory frameworks and internalizing compliance advantages can often access funding at lower costs, while models relying on regulatory arbitrage face valuation compression or marginalization risks. This process exemplifies the recursive improvement of the industry driven by regulatory normalization.

Outlook for 2026: A Recursive System of Capital, Returns, and Rules

The 2025 turning point in crypto fundamentally involves three simultaneous developments: capital shifting from individuals to institutions, assets evolving from narratives to on-chain dollar systems, and rules transitioning from gray areas to normalized regulation. These three elements are reshaping crypto from “high-volatility speculative assets” into a “modelable financial infrastructure,” constituting the first layer of recursive improvement.

Looking into 2026, research and investment should focus on three core variables: first, the transmission strength of macro interest rates and liquidity to crypto; second, the quality differentiation and sustainability of real yields in on-chain dollars; third, the institutional barriers shaped by regulation costs and distribution capabilities. The era where regulatory adaptability becomes a competitive advantage is dawning.

In this new paradigm, winners are not necessarily the projects with the best narratives. Instead, they are those with infrastructure and assets capable of continuous expansion under the constraints of capital, returns, and rules. This is the ultimate new order that the recursive improvement of the crypto market aims to reach.