While some of the risks prompting our cautious stance in early February have been partially mitigated, most still persist—with the ongoing trade war being most pertinent. Thus, we believe it’s prudent to remain patient. However, reading between the lines, there is a non-zero possibility that next week, we will receive material information regarding potential “budget-neutral” methods the US government could employ to acquire BTC. Depending on details revealed, this could inspire animal spirits to return.
Taking Inventory
The market has certainly been more placid this week, with crypto staging a nice bounce post-FOMC. Given the renewed optimism trickling back into the market, we figured it would once again be appropriate to review our assessment of ongoing risks to prices and reevaluate the near-term prospects of a revisit to all-time highs.
Below is the list of risks that we identified on February 4th. We added “Growth Scare” a couple of weeks ago as recessionary fears started to permeate the airwaves.
Near-Term Headwinds for Crypto (Identified on 2/4):
- Trade War – After tariffs on Canada, Mexico, and China were announced, it became apparent that the administration was serious about realigning global trade and willing to endure short-term pain to achieve it. The market’s reaction also showed that tariffs weren’t as fully priced in as many had expected. While the long-term implications of balancing trade might be bullish for BTC, the path is likely to be bumpy, as tariffs increase the risk of stagflationary pressures—which crypto doesn’t like.
- Lack of a Dovish Fed – From September through January, robust economic data forced the Fed to pause rate cuts and scale back its dovish stance. Based on subsequent data, much of the Q4 strength might have been due to front-running tariffs, and as of early February, the Fed’s reaction function remained limited.
- Headline Risk – Regardless of your political views, most agree that Trump is unpredictable and often uses social media to create leverage in negotiations. This unpredictability creates an environment where he could post something market-moving at any time. Crypto, as a reflexive asset class dependent on trend-following flows, is especially vulnerable in such a skittish environment.
- Flows Slowing – ETF flows and spot volumes were waning in early February, which was concerning given the amount of bullish news circulating (e.g., the White House executive order, bullish agency appointments).
- Growth Scare (Added After 2/4) – We did not anticipate how quickly fears of an overheated economy would flip to fears of slowing growth. This shift wasn’t entirely separate from the trade war, but was also fueled by rhetoric from Trump and Bessent on fiscal constraint, as well as developments on DOGE.
- Lack of Near-Term Catalyst – Although the medium- and long-term tailwinds for crypto are huge, government processes simply don’t move as quickly as crypto does, leaving no imminent policy catalysts to consider.
Below, we revisit these items one by one:
Trade War
As of today, the White House remains steadfast regarding reciprocal tariffs set to be implemented on April 2nd.
Polymarket seems to be taking the White House at its word, with current odds favoring a trade war persisting into April. At present, markets on Polymarket place the following probabilities:
- 34% chance tariffs on Mexico are removed by May.
- 8% chance tariffs on China are removed by May.
- 24% chance tariffs on Canada are removed by May.
- 64% chance the EU is hit with tariffs within Trump’s first 100 days.
If betting markets are siding with the idea that the trade war wages on, one might argue the market has priced these tariffs in almost completely. However, we received evidence on Thursday suggesting this is unlikely to be the case. When Press Secretary Karoline Leavitt was asked about tariffs by reporters, her response was that “there will be big tariffs.” This aligned with a drawdown in crypto, suggesting that despite sustained and additional tariffs being acknowledged on Polymarket, cryptoasset prices might not have fully reflected this reality.
Lack of a Dovish Fed
While the market seems to be at odds over where Fed Chair Powell landed on the dovish/hawkish spectrum, the most important takeaway from the FOMC for us is that he (1) downplayed many economic concerns that have plagued investor psyche over the past month and (2) executed a notable reversal regarding tariffs, referring to their inflationary impact as “transitory.” This starkly contrasts his tone back in December, when he explicitly suggested the Fed might need to factor trade policy into their decision-making process.
Furthermore, the Fed decided to front-run potential bank reserve volatility around the debt ceiling fiasco by tapering QT. To be clear, this is not QE, but it is marginally positive for liquidity-sensitive assets.
As we noted last week, Fed liquidity has begun rebounding, powered by the ongoing TGA drawdown. The cessation of QT should further buoy liquidity, at least in the near term.
Thus, we determine the situation around the Fed has at least marginally improved.
Headline Risk
This one is tough to quantify, but our view is that it will likely persist with varying severity until the completion of Trump’s term. Perhaps at some point, the market will become desensitized to presidential proclamations via Twitter—but that day is not today.
Lack of Flows
The flows picture can be summarized as follows: the bleeding has stopped, but capital isn’t flowing back into the space just yet.
- BTC ETFs have seen a few positive inflow days, but the magnitude of said flows were quite unremarkable. On the FOMC day, they posted a mere $12 million in inflows.
- Stablecoin inflows have remained impressive, but paired with abysmal volumes, it becomes apparent these stablecoins are being directed towards some combination of delta-neutral strategies, airdrop farming, or fundamental usage in payments.
- We continue to lack a sustained Coinbase Premium. BTC briefly traded positively post-FOMC, quickly shifting back into negative territory on Thursday.
- CME basis is at 4.7%, challenging YTD lows. This indicates minimal appetite from institutions to trade BTC on leverage.
Growth Scare
Data has not improved significantly, but signs indicate recessionary concerns are abating. High-yield credit spreads appear to have peaked, at least temporarily.
Additionally, the market’s reaction to subpar economic data seems to be changing.
Earlier this week, retail sales came in below market forecasts. January sales were revised lower, yet risk assets—including crypto—rallied.
Last Friday, poor consumer sentiment data similarly hit the tape, and again, the market was unfazed.
Thus, we can’t conclude that we’re immune to a growth scare resuming, but it likely would require materially weaker economic data to pose incremental risks to crypto prices. We would say this risk still exists but is less severe than it was in February.
Lack of Near-Term Catalyst
Recently, there has been chatter about the administration announcing actionable strategies for acquiring BTC in a “budget-neutral” way. This exact verbiage was used in the White House executive order establishing the Bitcoin Strategic Reserve on March 6th (see below). We discussed a number of potential budget-neutral options in a Crypto Comments video shortly after this EO was released.
The market has largely dismissed this as something that might not occur until the distant future, but upon reviewing the White House executive orders from January 23rd (the broad crypto EO) and March 6th (the SBR EO), one could argue we might receive information about these budget-neutral strategies as early as next week.
According to the timeline set forth in the January 23rd executive order (“Strengthening American Leadership in Digital Financial Technology”), Monday, March 24th, is the date agencies must submit recommendations to the Chair of the President’s Working Group (PWG) on the items the President required them to investigate.
We note that, one of the stipulations by the President back in January was to investigate the establishment of a digital asset stockpile.
Therefore, it’s possible that the “budget-neutral strategies” teased by the strategic reserve executive order (the one from March 6th) may be included in findings presented to the PWG Chair on Monday (or perhaps later in the week) since the SBR is among the topics the PWG has and continues to investigate.
The counterargument to this idea is that in the March 6th EO, there is language providing the Treasury with 60 days to evaluate the legal and investment considerations for establishing and managing the SBR – this could entail budget neutral acquisition strategies. This 60-day deadline would bring us to May.
The key point to hammer home here is that there is a deadline coming up next week for the PWG, and there is a non-zero chance in our view that “budget-neutral” strategies for acquiring BTC are included in the PWG recommendations. If this happens, we think it could potentially move markets, as we expect the findings and proposals from the PWG to be posted for public comment before reaching the President’s desk.
Although there would still be substantial time between next week and any actual US government funds going toward BTC purchases, it could incite animal spirits as investors become motivated to front-run government purchases.
Core Strategy
While some of the risks prompting our cautious stance in early February have been partially mitigated, most still persist—with the ongoing trade war being most pertinent. Thus, we believe it’s prudent to remain patient. However, reading between the lines, there is a possibility that next week we may receive material information regarding potential “budget-neutral” methods the US government could employ to acquire BTC. Depending on details revealed, this could inspire animal spirits to return.
