Core Strategy

While the market has repriced quite substantially to reflect optimism over trade, we believe further upside could come from ensuing changes in tax and regulatory policy. In the House’s latest bill, more than $4 trillion in tax cuts have been proposed, with just $1.5 trillion in spending reductions. This implies continued fiscal expansion, which is stimulative and, all else equal, positive for crypto.

Changes:

Increasing ETH Exposure:

We first flagged ETH as one to watch on May 2^nd and have been tracking its growing potential ever since. We are now formally increasing ETH exposure in our Core Strategy. Among the factors supporting this shift are: small cap outperformance, rising CME activity, a large buyer in Abraxas Capital, improving technicals, and a renewed cultural and strategic push within the Ethereum Foundation. A mean reversion to the 200-day moving average in ETHBTC would imply a price of approximately $3,150, assuming BTC holds around $105,000. If BTC moves higher, that target moves with it.

Trade Hurdle Cleared for Now

On Friday, we reiterated our bullish bias to clients but emphasized the need to read and react to the outcome of Treasury Secretary Scott Bessent’s meeting with Chinese trade officials over the weekend. We were watching for two key developments:

1. A significant reduction in tariff rates
2. A clear path toward a longer-term trade agreement

Both of these conditions were met.

The United States and China agreed to reduce tariffs to 30% and 10%, respectively, for 90 days, and both sides issued statements expressing a desire to continue dialogue and work toward a permanent deal. As a result, we believe the trade war can be set aside as a major market variable (for now).

This allows us to shift focus to other issues, such as tax policy and deregulation, which, if trends persist, should provide further structural tailwinds for risk assets. We plan to discuss these items further into next week.

Muted Funding Rates Point to an Under-Allocated Market

Just as many funds were caught offsides on the bullish side in the first quarter, we suspect many have been caught offsides in the opposite direction more recently. Perhaps the clearest evidence of this is the disconnect between BTC performance and funding rates.

This BTC rally has been highly unusual when viewed through the lens of perpetual futures funding rates. Funding rates are in the bottom 5% of observations since 2023, while 30-day returns are in the top decile. This is a rare combination that suggests two things:

1. Spot markets have led the rally, which is typically a positive sign
2. Funds remain under-allocated, likely due to losses or hesitation following Q1 volatility
3. Leverage remains low, which limits the potential for forced liquidations, reducing downside convexity

In short, this rally has been both healthy and likely unpopular, which increases the probability of continuation.

Raising Relative ETH Allocation

Last Friday, following the breakout in ETHBTC, we wrote that we would begin adjusting our Core Strategy in anticipation of ETH outperformance should the Bessent/China meeting go well.

That view was based on three key factors:

• Cultural and strategic momentum within the Ethereum ecosystem
• A shift in equities leadership from large to small caps (since 4/14)
• A pickup in bullish activity on the CME

Today, we add a fourth factor: Abraxas Capital Management.

Abraxas, an investment manager founded in 2002, now operates several crypto strategies, including an ETH-focused fund. Based on on-chain data, it appears they are actively accumulating ETH. While wallet attribution always carries some uncertainty, current estimates suggest their on-chain ETH holdings now exceed $800 million. These tokens are being moved from Binance into self-custody and deployed into DeFi protocols. On Tuesday alone, over $90 million in ETH was transferred from Binance to wallets labeled as belonging to Abraxas.

We do not have full visibility into how much dry powder remains nor whether they plan to lever up their position, but the presence of a large, real-money buyer is noteworthy. If ETH continues to show technical strength, this activity could spill into the ETF channel and broader spot market demand.

Did We Top on Good News?

Monday’s session saw equities gap higher and continue to rally, while crypto pulled back modestly. This looked like a classic “sell the news” reaction. Our read was that it was mostly deserved profit-taking after an incredible 1-month run (we shared this to clients in our crypto comments video yesterday evening). Crypto had already rallied in anticipation of a favorable trade outcome, while equities had not participated much during May.

Although price weakness following good news can sometimes signal a local top, it is difficult to read too much into a single day of price action, especially after the strength seen since mid-April. Price action on Tuesday seems to confirm this view thus far.

One noteworthy detail is that ETHBTC closed higher on Monday. If anything, that suggests that even if BTC experienced a local top, ETHBTC likely did not. Regardless, the relative strength of ETH further supports our decision to increase ETH exposure in the Core Strategy.