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Market sentiment and macro backdrop
In February, risk appetite deteriorated sharply as the crypto market sell-off deepened, pushing sentiment into extreme fear for most of the month and delaying expectations for a swift recovery.
Moreover, excessive leverage across majors suggests the healing process may extend over coming months. While traders have already priced in several macro policy and tariff uncertainties, renewed demand for spot BTC ETFs could still inject fresh momentum, especially if volatility in broader risk assets eases.
AI shock, software equities and Bitcoin
Fears around artificial intelligence disruption are weighing on Bitcoin, even though the driver is not crypto-specific news but a broad repricing of technology risk in public markets.
As concerns mount that AI could compress software profit margins, the US$10T+ software sector has sold off aggressively. However, this drawdown has dragged BTC lower as well, because many post-ETF institutional portfolios increasingly treat BTC and software equities as the same “tech risk factor,” prompting simultaneous liquidations.
That said, several valuation indicators imply that a floor may be approaching. Software sector EPS growth, at roughly 14%+, still exceeds the S&P 500’s ~13%+, while the forward price-to-earnings multiple has compressed to around 19x, compared with the S&P 500’s 22x. This rare discount historically tends to attract capital back into quality growth names.
Once AI-driven panic subsides and software stocks stabilize, forced BTC selling should diminish. At that point, the bitcoin etf momentum generated since approval could reassert itself and allow Bitcoin‘s monetary narrative to come back into focus.
N7 Index and DeFi rotation
The N7 Index, an equal-weighted basket of NeoFi protocols, has returned +3.5% YTD, significantly outperforming BTC by about 27% and the DeFi Core Index by roughly 33% during the same period.
Moreover, this n7 index performance underscores a clear market preference. Investors appear to favor protocols with recurring fee income, productive tokenomics and growing institutional alignment, rather than older DeFi projects that rely primarily on governance tokens without robust cash-flow mechanics.
Performance dispersion within DeFi has also widened, suggesting that capital is rotating based on protocol fundamentals instead of broad sector beta. However, this selective rotation may leave weaker projects structurally discounted if they cannot demonstrate sustainable usage and revenues.
Prediction markets and attention-based trading
Leading on-chain prediction markets are shifting from an early hyper-growth stage into a more mature period of stabilization, supported by gradual regulatory catchup across major jurisdictions.
Moreover, as platforms expand beyond simple binary outcomes, a new class of attention markets is emerging. These introduce sentiment-based trading, allowing users to express directional views on narratives and social signals, which could deepen liquidity and broaden user engagement.
At the same time, more real-time trading pairs are being listed, linking event-based contracts with liquid reference assets. This evolution helps bridge crypto-native infrastructure such as Chainlink oracles to a wider audience by offering familiar trading experiences anchored to off-chain data.
Ethereum scaling and L2 inflection
General-purpose Ethereum layer-2 networks are approaching a structural inflection point as advances in zkVM architectures and Ethereum’s own scaling roadmap challenge the original “faster Ethereum” narrative.
This shift has been amplified by Vitalik Buterin‘s recent commentary, which questioned the initial role of L2s in the long-term ecosystem design. However, the data also shows a behavioral change: user engagement on L2s is falling relative to Ethereum mainnet.
The ratio of L2 to L1 daily active users declined to 1.12 in February 2026, down from a peak of 10.43 in June 2025. That represents a steep 68% year-over-year drop and signals that the standalone value proposition of many L2s is under pressure.
Moreover, as the broader crypto market capitalization narrative evolves and execution environments diversify, L2 teams may need to differentiate on specialized use cases, such as high-throughput trading, gaming or privacy, instead of relying solely on generic throughput improvements.
Outlook for March 2026
Heading into March 2026, the interplay between AI-driven equity repricing, institutional portfolio construction and on-chain sector rotation will likely remain central to digital asset performance.
However, with software valuations resetting, DeFi fundamentals gaining weight and prediction markets maturing, the landscape appears more driven by underlying cash flows and utility than in previous cycles, even as leverage and macro uncertainty continue to temper risk-taking.
In summary, once AI volatility stabilizes and liquidity conditions normalize, structurally sound protocols, selective L2s and renewed BTC flows through spot ETFs could lead the next phase of recovery in digital assets.
English (US) ·