Original author: Matt Hougan, Chief Investment Officer of Bitwise
Original translation: Chopper, Foresight News
In previous memos, I typically focus on one core issue in the market, but given the current complexity of industry variables, it’s difficult to proceed with a single logic. This article analyzes the market from three dimensions.
1) Cryptocurrency assets have turned into contrarian investment choices
The current crypto market is bleak. Bitcoin has dropped 21% this year, while mainstream cryptocurrencies like Ethereum, Solana, and XRP have seen even steeper declines of 33%, 37%, and 31% respectively. Crypto ETFs continue to experience net outflows, and spot trading volumes have fallen to multi-year lows.
The key reason for the weakening market is that crypto is no longer the hot trend in the capital markets. Stocks related to artificial intelligence, robotics companies, and SpaceX are thriving, with the Nasdaq 100 index up by as much as 43% this year, leading funds to show little interest in the crypto space.
In an environment where the AI sector is siphoning funds from the entire market, the crypto industry is undergoing painful transformation: shifting from a popular theme that follows trends to contrarian positioning.
This marks a crucial turning point affecting the industry's direction. Trend-based investing rides the wave of market enthusiasm and is pleasurable when the market rises; however, contrarian investing is a long and torturous process that tests investors' patience, long-term thinking, and fundamental analysis abilities, with returns being sporadic.
This also explains why current crypto funding increasingly values project revenues, as protocols with solid fundamentals like Hyperliquid are particularly favored. The market has not given up on the crypto space, but under contrarian investment logic, funds have moved away from emotional speculation and towards projects with strong fundamentals.
The crypto industry will not perish; rather, the types of investors and projects that the market rewards have fundamentally changed. Understanding this is key to seizing profit opportunities in the next bull market.
2) The market waits for regulation to land, but the CLARITY Act is unlikely to be born
The second major driver of the sluggish crypto market is the enormous regulatory uncertainty brought by the CLARITY Act.
This act is the core framework legislation for the U.S. crypto sector, currently being advanced in Congress, aimed at establishing a unified regulatory framework for crypto across the United States. Although the act recently passed a hurdle in the Senate, market prediction data from Polymarket shows its likelihood of approval within the year is only 55%. My personal viewpoint is more pessimistic: insiders I have recently contacted in Washington anticipate a 30% chance. Regardless of whether the probability is 5%, 30%, or 50%, the act’s approval is by no means guaranteed.
Uncertainty continues to lead institutional funds to stay on the sidelines. From the perspective of large institutional investors, the choice is binary:
· Invest in AI stocks, which keep breaking historical highs;
· Allocate to crypto assets, but face nearly 50% risk of unfavorable outcomes with the act's approval in the next two months.
The latter is unlikely to attract funding interest.
From this, we can infer that until regulatory clarity is achieved, major cryptocurrencies are unlikely to enter a sustained bull market. Compared to the outcome of the act’s eventual passage or failure, eliminating uncertainty is even more critical. If the act is approved, crypto will see a rise; if it fails, the industry can gradually digest the negatives; only in the unresolved tug-of-war phase will the market struggle to strengthen.
3) Funds are shifting towards the next generation of fundamentally sound projects
This bear market is entirely different from past crypto winters: in previous bear markets, funds collectively sought refuge in Bitcoin, causing altcoins to collapse across the board; however, this time, funds are no longer crowding into safe assets but are instead positioning towards smaller-scale, fundamentally reliable emerging projects.
Monthly return data for various cryptocurrencies in May 2026: what stands out is not the widespread downturn, but the assets that are counter-trending. Bitcoin, Ethereum, and Solana have all weakened, but Hyperliquid surged by 72% in a month, Zcash rose by 50%, and XLM increased by 44%. None of these are major market cap coins, yet they have attracted funding due to their unique fundamental logic.
This exemplifies the "contrarian investment logic" mentioned earlier: as crypto moves away from trend-based speculation, fundamentals have become the core of pricing, indicating that funds are switching their focus.
At the same time, the localized profits from certain assets against the trend also suggest that this bear market has entered its mid to late stages. During deep bear market phases, the entire market tends to fall; when a batch of assets rises independently based on real fundamentals, it indicates that the market cycle is about to switch.
Conclusion
To be honest, the market will remain under pressure in the short term. The tug-of-war over the approval of the CLARITY Act continues, with SpaceX on the verge of going public and Anthropic submitting a prospectus, and AI themes are still dominating financial headlines. Currently, increasing exposure to crypto assets is likely to result in poor experiences, but the essence of contrarian investing is to position in overlooked areas, making counterintuitive decisions against the trend.
Today's crypto market is just that; patience and composure are the keys to victory. Anchoring on fundamentals and identifying quality assets will yield substantial long-term returns.
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