Core Strategy

Crypto continues to benefit from supportive conditions, and the near-term setup favors continuation. A new golden cross has been triggered for BTC, with post-2020 signals showing an 83% 90-day win rate and a 19% median return. FTX creditor repayments, totaling $5 billion, are underway and may recycle capital back into crypto markets, boosting risk appetite. Flows remain strong. ETF demand is steady, the Coinbase premium persists, CME basis is climbing (with ETH now above BTC), and stablecoin supply has grown by $6 billion over the past week. At the macro level, renewed concerns about fiscal deficits and bond market stress reinforce the longer-term thesis for BTC as a hedge.

Note: Our equities baskets are not risk-managed/rebalanced in the same way that our Core Strategy is.

Fiscal Deficits to Persist

After the quasi-trade deal was announced between China and the US, we said that, at least for the time being, we’d be able to move past the topic of trade and shift focus to other areas. We posited that the new narrative in the crypto market would be tax and regulatory policy. While the idea of “deregulation” is a bit more nuanced and harder to quantify, tax and budget policy, and by extension, the long-term fiscal position of the US, is not.

From our note last week:

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.

As you all know, a big reason we’re in this business in the first place is because of reckless government spending, persistent fiscal deficits, and the eventual monetary debasement that results from this widening imbalance.

As evidenced by recent moves in the bond market, it’s clear that investors view the impending tax bill as just as fiscally irresponsible as the prior administration’s policies. There is an outright protest in the bond market as a result. The US 30Y surged above 5% again, and the 20Y auction was poorly received, sending assets tumbling into Wednesday’s close.

This is not just a US problem. Japanese investors saw their 30Y yield climb to nearly 3.2%, up from under 1% just a couple years ago.

While there were lofty promises from both DOGE and Congress, it seems DOGE has been disbanded, and Congress has found roughly ~$1.5T in offsets to the ~$4T in tax cuts currently proposed in the Big Beautiful Bill.

Below is CFPB estimate for near-term deficit expansion. In their analysis from May 15^th, the forecasted deficit for 2027 increased from $1.7T to $2.3T  (34% increase).

The much-discussed Moody’s downgrade (which was a nothingburger for markets since it reflected known policy and wasn’t news to anyone) included a forecast for deficits to expand to 9% of GDP.

Of course, there are plenty of permutations of the deficit projections. It is difficult to assess the increase in GDP from tax cuts, and interest expense has a wide distribution of potential outcomes. The projections acquired from the CRFB are likely more conservative, given their role in advocating a responsible budget. But ultimately, most existing models are debating the extent of deficit expansion rather than whether one will exist.

Now, Scott Bessent would argue that we will outgrow the pace of debt issuance. That’s certainly possible, but it would require either (1) an increase in the number of workers or (2) a rise in productivity.

Clearly (1) is not on the table, as reducing undocumented labor has been a priority, and one they’ve been successful with so far. As for (2), deregulation could help, but real gains would have to come from private-sector execution. I’m a long-term believer in AI and its potential to drive a productivity boom, but that will take time. And once AI reaches a point where it meaningfully impacts the labor force, we may find ourselves needing more fiscal spending due to fewer jobs available for humans. But that is a debate for another time and place.

So, while a productivity boom is possible, it’s not something investors can reasonably underwrite. That leaves us with (3) inflation and/or (4) financial repression. Either path is ultimately supportive of monetary hedges like gold and bitcoin.

Some may argue that the Fed could shift to a more hawkish stance, which would be a headwind for bitcoin. But the hard data doesn’t support that right now. And if the Fed tried to induce a recession to control inflation, what do you think would happen to yields? Investors are already wary of buying bonds from a country running a 6-7% percent fiscal deficit while the economy is strong. It is unlikely those same securities would look more attractive once tax receipt forecasts were halved.

It is quite the predicament. And it is not one this administration is solely responsible for, nor the one before it, nor the one before that. This is a systemic issue born from the debt-based fiat currency regime, built by short-sighted, pain-averse politicians. The market is starting to wake up to this reality and view BTC as the “escape hatch.” There will certainly be near-term risks to manage around, as we did successfully in Q1, but if this narrative continues to build momentum, it should remain a near-term tailwind for BTC.

Golden Cross

We just witnessed the 50-day moving average move above the 200-day moving average for the first time in a month. This is affectionately termed a “golden cross.” While technicians are mixed on the efficacy of this as a signal, the historical record clearly shows a pattern of continued upside following the event.

There have been 12 golden crosses since 2012, and the early results from BTC’s formative years are somewhat mixed. However, as with most of our historical analyses of BTC price action, we take those early years with a grain of salt given the market’s small size and its detachment from broader macro conditions.

If we narrow the lens to post-2020, when BTC became more relevant, the results are far more compelling. The 90-day win ratio is 83%, with a median return of 19%.

FTX Repayments

This week, creditor repayments from the FTX bankruptcy are beginning. An estimated $5B will be remitted to claimants. I’ve spoken with colleagues who have already started to receive their funds. While it’s unclear how much of this capital will flow back into crypto, the fact that BTC recently made new all-time highs in a trending market leads me to believe a good portion will reenter the space.

Regardless, investors will be better capitalized. From a psychological perspective, that alone should contribute to a market that is more inclined to take risk.

Flows Remain Solid

Given the strength of the bid in BTC over the past month, the lack of leverage, and, anecdotally, how sidelined most traders have been, it’s clear that the corporate bid has remained strong. Now, we’re starting to see more speculative flows enter the fold (charts below).

• CME basis for both BTC and ETH futures has moved higher. Interestingly, ETH basis is now above 10%, compared to 8.7% for BTC
• ETF flows have remained solid
• The Coinbase premium has been persistent
• Stablecoin supply has increased by over $6B over the past 7 days