IN TODAY'S ISSUE:
- Bitcoin fell 11.7% as tariffs and geopolitical turbulence upended markets this quarter.
- This was one of bitcoin’s weakest first quarters, but what eventually mattered for annual returns is where we were in the cycle.
- While bitcoin’s correlations rose with US equities and decreased with volatility, we think that speaks to the asset’s highly liquid nature rather than the fundamental properties of the asset.
- Most ETFs saw net outflows, with IBIT being a notable exception. IBIT’s inflows were even more impressive given the headwind the basis trade unwind likely caused on flows.
- BITO also saw strong inflows, which were likely related to the basis trade unwind as some hedge funds were likely short BITO rather than CME futures.
- The changeover in administration was the most notable event of the quarter, with changes underway at the various agencies. Many more changes are still in store, which should be supportive of bitcoin and the industry at large.
- The industry could get its first non-BTC or ETH ETF as ProShares’s Solana ETF, which holds CME traded SOL futures, is expected to be deemed effective on April 16th. Trading could start shortly after that.
- As the market continues to digest the impact of Trump’s tariffs, bitcoin has found some stability. Bitcoin, a non-sovereign store of value outside the realm of tariffs, should ultimately benefit from the global instability caused by economic and geopolitical changes.
PERFORMANCE REVIEW
Bitcoin Sinks as Economic Uncertainty Rises
Bitcoin sank 11.7% in the first quarter as uncertainty about the new administration’s economic policy weighed on markets. With the signature policy tool tariffs, whose on-and-off again nature caused havoc on markets this quarter, and the economic impact of DOGE-driven cost savings initiatives, volatility was on the rise. Bitcoin also likely suffered from a “buy the rumor, sell the news mentality” during the quarter. Even though much of what transpired was good for bitcoin and the digital asset industry at large, most of these changes were already anticipated or previewed. Without incrementally good news to take bitcoin higher, many investors took profits on gains driven by the election outcome in November.
There was a retreading of asset winners and losers this quarter as the administration took office and began instituting its economic and political agenda. US equities mostly struggled, but with some noted outperformance in defensive sectors and sectors that would benefit from a Republican-led administration (utilities, staples, materials, financials, energy). Developed market equities ex-US did well against this backdrop as well.
Precious metals, gold and silver, were the standout performers this quarter given the upending of long-standing geopolitical ties and rise in macroeconomic entropy. Bonds performed well, and real estate nudged higher during the quarter.
Ranking Quarterly Returns
The first quarter wasn’t very good by bitcoin standards - Q1 2025 ranked 12th out of the 15 first quarters since 2011. The good thing is that a weak first quarter doesn’t say much about the rest of the year. In the prior 6 first quarters with a negative return, for the full year, bitcoin was up half the time and down the other half. What determined if bitcoin was up or down was where we were in the cycle. The years with annual declines following negative Q1 performance were all the end of the cycle, the big drawdown following a cyclical high – 2014, 2018, and 2022. Every other year ended up inciting the all-important question, “Is the cycle over?”
Correlations With Equities Rise
Bitcoin’s correlations with US equities rose this quarter, while its correlations with gold and the US dollar index narrowed. Bitcoin’s 90-day rolling correlation with US equities ended the quarter at 0.51, still well below the previous high of 0.72 set in 2023 but well above its long-term average. Bitcoin has been affected by market sentiment and risk appetite over the short term; its correlations with US equities have risen, and inverse correlation with volatility has fallen. Bitcoin’s highly liquid and always-available-for-trading nature make it a natural asset for investors to reach for during these types of moments. That has nothing to do with the financial properties of the asset but rather speaks to its liquidity more than anything else.
THE EVENTS THAT SHAPED THE QUARTER
Changing Political Winds Front and Center
The highlight of the quarter was the changeover in the administration with the inauguration of President Donald Trump on January 20th. With that came a sea change in regulatory and legislative attitudes toward the digital asset industry. Explicitly from the executive branch, we saw two Executive Orders, one ordering a comprehensive review of legislation and regulation and improved efforts to support the digital asset industry, and a second that created a strategic bitcoin reserve (SBR) and a digital asset stockpile. The White House also brought key legislators together in a press conference on digital assets as well as held a digital asset summit with key industry executives.
Legislation on Tap with a Stablecoin Bill
Legislators in the House and Senate are busy hammering out the final details on stablecoin legislation, one of the industry and administration’s most pressing tasks. The House just passed a version of its bill, with Senate negotiations underway. The two bills would need to reconcile key differences, like how to treat foreign issuers such as Tether, before being sent to the President. Trump had said he hoped to sign stablecoin legislation by the August recess. While a market structure bill is still in the wings, that does not seem to be a pressing matter at this time. Also, during the quarter, Senator Lummis launched a refreshed version of the BITCOIN Act, which would enshrine the SBR into law and provide a way for the US to acquire more bitcoin by revaluing gold certificates. Right now, with the SBR stipulated under an Executive Order, it could be reversed by the next president with the stroke of a pen, and a law makes it more permanent.
Regulatory Changes Afoot
With the change in administration came a change in nearly every financial regulatory body, excluding the Fed. Changes were biggest at the SEC, which created a crypto task force and listed a raft of crypto initiatives, most of which should be positive for the industry. The SEC also fundamentally rearchitected its approach to litigation and either settled or dropped most of its outstanding lawsuits against crypto companies and individuals. The agency also dropped the controversial SAB 121, which required SEC reporting companies that custody crypto on behalf of clients to report them on their balance sheet.
Things at the CFTC were notably quieter but it did announce that it restarted joint conversations with the SEC. The CFTC also removed the risk identification requirement for Derivatives Clearing Organizations (DCOs) and brought industry executives together to discuss tokenized non-cash collateral such as stablecoins. Solana (SOL) futures also launched on the CME, marking the first expansion of digital asset futures since ETH futures launched in 2021.
The FDIC found itself the center of 2 Congressional hearings, one on debanking and the other on preventing banks from engaging in crypto activities, colloquially known as “Operation Chokepoint 2.0.” Ahead of the hearings, numerous communications between the FDIC and regulated entities were released under the Freedom of Information Act, highlighting the regulator’s role in stonewalling banks and their engagement with crypto. Later in the quarter, the FDIC issued a letter removing the requirements that banks had to notify the regulators and obtain non-objection letters concerning their crypto activities, reversing the action that resulted in Operation Chokepoint 2.0.
The OCC reaffirmed its prior stance that banks can provide custody services, hold stablecoin deposits, and engage in stablecoin payment activities.
Trump Embraces Crypto Directly and Indirectly
While Trump has been supportive of bitcoin and the crypto community, he also embraced the industry in both direct and indirect manners this quarter. On the threshold of his inauguration, Trump and his wife issued memecoins, TRUMP and MELANIA. While the coins are down 87% and 95% from their post-launch peaks, their launch was not expected by the industry.
Trump Media and Technology Group, the public company owned in majority by the president, announced it would launch bitcoin ETFs and separately managed accounts (SMAs) in conjunction with Charles Schwab. It also announced its intention to partner with Crypto.com to launch ETFs with its CRO token.
Trump’s DeFi project, World Liberty Financial (WLF), said it completed $550 million in token sales through two offerings. It also diversified its treasury holdings into BTC, ETH, and various other assets and announced it would create a stablecoin, USD1, on Ethereum and Binance Smart Chain (BSC).
Finally, Hut 8 formed a new bitcoin mining venture, American Bitcoin, with Eric and Donald Trump Jr’s recently formed American Data Centers. Hut 8 would contribute its bitcoin mining assets in exchange for 80% ownership. Eric Trump will serve as Chief Strategy Officer.
Issuers Vie for New ETFs
With the changeover in administration and regulatory heads, hopeful issuers of new ETFs have lined up, submitting filings nearly daily. ETFs for digital assets big and small have started the process, including SOL, XRP, LTC, HBAR, DOGE, DOT, and ADA, to name a few. The issuers seem to be in such a hurry to offer these products, they don’t even seem to know what the underlying instruments are – one issuer put down the wrong ticker for the digital asset in its fund. The ProShares’s Solana ETF, which holds SOL futures that launched on the CME this quarter, is expected to be deemed effective on April 16th and could start trading shortly after.
Economic Actions and Geopolitics Rankle Markets
Wednesday, Liberation Day, marked the day when Trump unveiled “reciprocal tariffs” to many nations. Tariffs have been Trump’s signature economic activity, acting both as a carrot and stick with the US’s trading partners. Unfortunately, as the market reaction on Thursday shows, investors are not a fan of tariffs. While blanket tariffs appear to be here to stay now, Trump’s yo-yoing of tariffs since his inauguration injected significant volatility into markets, impacting both US stocks and bitcoin.
Tether Coming to Bitcoin and Lightning
The biggest technical announcement this quarter was the reveal that Tether would be bringing its USDT stablecoin to Bitcoin and the Lightning Network. While details about the launch are still forthcoming, Tether’s presence as the largest stablecoin issuer is an important development for Bitcoin and Lightning. Investors have long been critical of the fact that Bitcoin isn’t heavily used for payments. With the premier stablecoin issuer coming to the network, Bitcoin and Lightning may reclaim some of this use case that has been ceded to other networks and technologies.
Bybit Hack Stark Reminder of Custody Practices
The $1.5 billion hack of Bybit, the largest single theft in human history, was a low point for the industry during the quarter. The hack, attributed to state-supported actors, not only fuels global instability through North Korea’s nuclear weapons and ballistic missile programs but paints the digital asset industry in a troublesome light, unable to rectify the original sins created by Mt Gox. We also think Bybit’s framing of their key management procedures as “cold storage” was disingenuous at best and misunderstanding what constitutes cold storage at worst. It allowed institutions like NYDIG to demonstrate our value proposition in running cold storage custody, but we would have preferred not to do that in response to an event like the Bybit hack.
ETFs Mostly Show Outflow, with Some Outliers
With the decline in spot this quarter, it’s not surprising to see net outflows from most of the ETF complex. IBIT, however, continues to be a standout performer, gathering up $2.7B of flows during this quarter. What’s even more impressive is that these fund flows come even as hedge funds unwound their basis trades—roughly $1.49 billion worth of futures shorts were taken off by hedge funds in the quarter. Given hedge fund preference for IBIT as their spot hedge, these inflow numbers reported by IBIT are even more impressive.
Strangely, and we had to triple-check this, the ProShares Bitcoin ETF (BITO) saw healthy inflows this past quarter, over $330M. It’s not clear what drove this dynamic, but our guess is a covering of short positions. We believe some hedge funds engage in the basis trade by shorting shares of BITO instead of CME-traded futures – BITO owns front and second-month contract CME futures. As the basis came in last quarter, hedge funds covered their short positions by buying BITO.
Network Activity Subdued
Activity across the Bitcoin network is down since peaking following the election. According to Glass Node, entity adjusted daily volume is still around $8B on trailing 7-day average, but that’s down from over $20B in November. Bitcoin’s mempool, the global waiting room of unconfirmed transaction, is down, but surprisingly, text and BRC-20 inscriptions (Ordinals) remain robust. Transaction fees have fallen significantly against this backdrop, running at 2-4 sats/vb, and accounting for 1-2% of miner revenue.
What hasn’t dropped is the Bitcoin network hash rate. This metric continues to set new highs even as fees remain light bitcoin’s price has fallen from the highs. Given the efficiency and breakeven prices for new mining rigs, it's reasonable to expect hash rate to continue to come online, keeping pressure on the hash price.
Defi on Bitcoin Ramps Up
Bitcoin “defi” applications have seen significant growth over the past 12 months, clocking in at $5.3B today, according to Defillama. While most of that has come from the launch of Babylon’s restaking platform and associated liquid staking protocols, there has been a growing movement through bridges and wrapped assets to make bitcoin a more productive asset. That makes sense as bitcoin is $1.6T of the best capital in crypto, plus it’s highly underutilized in defi applications. The mechanics of how these various protocols operate differs significantly and we hesitate to call many of them layer 2s at all, but that hasn’t stopped them from growing significantly. We think there are better ways to generate yield on bitcoin, but given their popularity despite numerous risks, we think these applications will only continue to grow.
LOOKING AHEAD
Stablecoins Lead the Legislative Slate
While we aren’t certain stablecoin legislation will be signed into law in Q2, it’s easily first on the docket of crypto bills to be signed. Lawmakers are currently hammering out the details, but some big details are yet to be decided, such as how to regulate foreign issuers like Tether. We haven’t heard much on market structure reform, the FIT21 bill, the other major crypto legislation that has been proposed. We guess that with stablecoins as the major focus right now, this has taken a back seat. We may get some cues as to how this shapes up when the President’s Working Group on Digital Asset Markets submits its final recommendations, but that isn’t scheduled to happen until July 22nd. The BITCOIN Act, aimed to engrain the BSR as a law rather than just an Executive Order, has garnered support from several Republican senators but has yet to advance in the lawmaking process.
SEC to Provide Increasing Clarity
With Paul Atkins confirmed as the new SEC head, the agency can push forward on the initiative it outlined some months ago. That hasn’t stopped the agency from offering guidance on things like PoW mining and memecoins and settling or scuttling outstanding enforcement actions, but some of the more complicated issues may be awaiting the arrival of the agency’s new chief. Commissioner Hester Peirce outlined 10 crypto initiatives the agency was seeking to address: security status, token offerings, broker dealer definitions, and lending and staking, to name a few. We look forward to greater industry clarity in the coming quarter, most of which we expect to be welcomed by the industry.
Pathway for Banks to Custody Crypto
During the quarter, several roadblocks were removed to allow banks to custody and engage with digital assets, including stablecoins. This includes the repeal of the SEC’s SAB 121 and clarifying statements from the OCC and FDIC. We know that some of the world’s biggest custodians, BNY Mellon and State Street, are building custodial efforts, and we wouldn’t be surprised to see other banks and custodians do the same.
While the potential to custody BTC, ETH, and whatever assets are approved for ETFs is one opportunity, the bigger opportunity lies in the custody of other tokenized financial products, like stablecoins, money market funds, bond funds, and other instruments. So-called real-world assets (RWAs) have been a hot topic lately as some of the world’s biggest investment managers have pushed into the space, including BlackRock, Franklin Templeton, and Apollo. In addition, the DTCC recently announced a new platform for tokenized collateral management. The world is increasingly moving towards tokenization, and while the $2.6T in open-source digital assets like bitcoin is certainly large, the opportunity for tokenized RWAs far surpasses that.
Other ETFs to be Approved?
With the changeover at the SEC, ETF issuers have been lining up to launch funds for every token under the sun. It looks like ProShares’s Solana futures ETF could start trading shortly after April 16th, but regulated futures trading on the CME is one thing. We’ll get a real test by July 2nd, the final date for the SEC to decide on the conversion of the Grayscale Digital Large Cap Fund (GDLC) to an ETF. This fund holds spot BTC and ETH, which the SEC is fine with, but it also holds spot XRP, SOL, and ADA, three assets the SEC has never opined on, other than in now defunct lawsuits. Ironically, these are the 5 assets Trump suggested would comprise the digital asset stockpile (they are not simply the 5 largest non-stablecoin assets).
Given how little net demand there has been for the ETH ETFs, $2.4B in net inflows since launch, we question what the demand would be for some of these other funds. Litecoin? Polkadot? Bonk? Just because the SEC may allow these ETFs doesn’t ensure there is investor demand. Our guess is that bitcoin will continue to take the lion’s share of fund flows in the digital asset landscape even if other ETFs do launch.
Markets Continue to be Roiled by Trump Tariffs
The geopolitical order and economic backdrop have been upended by Trump’s signature financial policy, tariffs. The S&P 500 has fallen 14% since Trump took office, while bitcoin has tumbled more than 22%. While bitcoin has struggled to adapt to these new economic realities, it is a highly liquid asset available to traders 24/7, it seems to have found its footing at these price levels. Perhaps investors are coming around to bitcoin’s properties, a globally fungible asset not beholden to any sovereign entity. It is exempt from tariffs, and as a politically neutral asset, it should be exempt from the global machinations at play right now. Non-sovereign stores of value, like bitcoin, should do well against that backdrop.
