The market will soon emerge from the geopolitical crisis, but a weakened BTC demand may lead to a larger pullback

2025-06-25 14:00

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We should be cautious about the recent trend where many publicly traded companies are incorporating BTC into their corporate reserves, as this may actually be a negative FOMO signal.

Original Article Title: "SignalPlus Macro Analysis Special Edition: Escalate to De-Escalate?"

Original Source: SignalPlus

Geopolitical tensions escalated over the weekend as US bombers launched rapid and precise strikes on three deep nuclear facilities within Iran. The US reported severe damage to the facilities, but official confirmation on whether nuclear materials have been destroyed or evacuated beforehand is still pending.

The market instinctively sold off risk assets, with cryptocurrency being the only asset class trading continuously over the weekend and naturally bearing the brunt. At the onset of the attack, BTC dropped around 4% from above 102k to around 99k. It is essential to note that in the eyes of traditional financial investors, cryptocurrency is still perceived as a pioneering/high-risk asset.

Due to the escalation of the situation, there were concerns in the market that a significant risk-off reaction would occur at Monday's open; however, such concerns rapidly dissipated during the Asian early session. A growing viewpoint in the market suggests that this action may represent a successful "escalate to de-escalate" strategy, using a crucial show of force to advance negotiations. Additionally, the practical challenges of blocking the Hormuz Strait (where most of Iran's oil and gas exports flow to China) have alleviated concerns about an uncontrollable spike in oil prices.

The price action in early Monday trading seems to confirm this viewpoint as US stock futures have almost returned to Friday's levels, oil prices are stable at around $75 per barrel, spot gold has retraced its earlier gains, and the USD has retreated to pre-conflict lows against the Israeli Shekel.

Generally, geopolitical pressure is often short-lived and has only a temporary impact on the stock market. A recent Citigroup study showed that the SPX index tends to display a negative reaction before geopolitical events heat up, but once the events actually occur, the performance is usually not poor. If we believe in the market's efficiency and its ability to proactively reflect known and foreseeable unknown risks, such conclusions are reasonable. Unless there is an unimaginable large-scale destructive weapon attack or another extreme unforeseen event, we expect the risk market to gradually adapt to this conflict and refocus on ongoing tariff negotiations and economic development.

In the interest rate market, despite ongoing discussions about the massive US interest expense and potential inflation risks, interest rate implied volatility has dropped to a mid-term low point, indicating that the market does not expect substantive action from developed country central banks. The overall forward interest rate trajectory remains stable, and bond traders have returned to normal operations.

Meanwhile, according to the majority view on Wall Street, current market liquidity (i.e., financial conditions) remains quite ample, allowing risk assets (such as stocks) to continue climbing the "wall of worry." Despite Liberation Day, ongoing Russia-Ukraine conflict, and escalating Iran tensions, the SPX index has managed to rebound strongly.

While macro observers may still hold a long-term bearish view, investors are voting with real money. Amid various warnings, risk sentiment remains notably bullish, the overall economy continues to operate, and corporate earnings are steadily rising.

Unfortunately, the same cannot be said for the cryptocurrency market. BTC dropped 4%, touching near $98.9k, while ETH saw a steep decline of about 10% to $2,150, hitting its lowest intraday price since early May. As news of the Iran airstrikes emerged, with cryptocurrencies being the only asset still trading, they naturally faced selling pressure, resulting in over $1 billion in futures positions being liquidated over the weekend.

Despite stocks, oil, and gold prices reversing their weekend trends in early trading, cryptocurrency prices struggled to rebound in sync. Investors remained in long positions as the conflict unfolded, facing significant account volatility over the past month. Cryptocurrency prices have been unable to break out effectively since Q1, and BTC has struggled to surpass its high point in February.

Last week, Glassnode conducted an outstanding analysis, showing that despite strong interest in BTC from the TradFi community, on-chain transaction activity has significantly slowed down. In summary, as mainstream investors attempt to gain BTC exposure through traditional tools (such as ETFs and futures), off-chain (OTC) trading is active. However, on-chain activity has not recovered since the FTX event. This can be seen through the lackluster performance of DeFi and Altcoins, as well as the limited new narratives (beyond stablecoins/RWA).

Likewise, the power law distribution phenomenon is becoming more common in the cryptocurrency space. On one hand, BTC's market dominance continues to rise, while on the other hand, its on-chain transfer activity is increasingly concentrated in large wallets. According to Glassnode's data, transactions exceeding $100k account for 89% today, up from 66% in 2022, further confirming the view of a "whale"-dominated market, with small accounts having less influence and participation in the market.

Unfortunately, as the cryptocurrency industry continues to mature and accelerate its institutionalization, this trend is likely to persist, perhaps as an inevitable outcome.

Furthermore, as BTC becomes a mainstream asset class, it naturally must also follow the operating rules of other macro assets, that is, dominated by the participants with the largest capital volume, with off-chain transactions far more active than on-chain transactions. Longtime observers point out that this cycle is different from the past, lacking altcoin hype or the rise of a new narrative, but this was actually anticipated long ago. TradFi participants prefer to engage in the market through tools they are familiar with (off-chain), and autonomous custody and on-chain narratives are of limited appeal to this group. However, since they possess a much larger capital size than native users, their behavior and preferences will increasingly dominate price trends.

This shift in macro correlation can be observed through the significant increase in BTC futures open interest. Since the fourth quarter of 2024, the sharp change in BTC futures open interest has been a primary driver of the more frequent occurrence of liquidation cascades (such as last weekend). The combination of off-chain activity and futures-driven price movements implies a higher macro correlation, making the impact of cryptocurrency-native momentum weaker.

At the same time, cryptocurrency options trading activity has also seen a significant increase in this cycle. The overall market's daily trading volume has surged from $1.5 billion in 2024 to a recent high of $5 billion, indicating that increasingly mature market participants are adopting more options strategies to manage risk.

Returning to the current moment, BTC's demand momentum appears to be weakening. According to CryptoQuant's data, its demand momentum index has hit a historical low, and even with a series of bullish policies in the market (such as the Genius Act and the Hong Kong stablecoin policy), the price has been unable to effectively break above previous highs as short-term hodlers (i.e., new funds) seem to be slowing down their supply.

In terms of market volatility, price changes indicate that traders were caught off guard by this volatility, with implied volatility soaring amidst a previous one-way downtrend. Put options saw significant buying pressure, especially on ETH, indicating that market participants are seeking downside protection while holding a long delta. There may be further downward pressure on the market in the short term.

Looking ahead, we believe the market will soon digest and move past this geopolitical event, and we may even see some kind of peaceful breakthrough in the Russia-Iran situation, as well as substantive progress in tariff negotiations. The market will naturally rise on these developments, but the focus will also return to the issue of high valuations. The current SPX index has already reflected a +12% earnings growth expectation to $296 (equivalent to a 20x forward P/E ratio), yet the U.S. economy appears to be slowing down in reality (employment indicators, CEO layoff expectations, etc.).

As always, in line with our stance, we do not recommend shorting the current stock market uptrend. However, we believe that this rebound rally is nearing its end, and at this stage, we should focus more on risk reduction. In the cryptocurrency market, given the recent price action, we are more concerned that the market may experience a more significant correction to shake out recent chase-high funds and weak hands. We are also wary of many public companies incorporating BTC into their corporate treasuries as a "financial engineering" move, which may actually signal a negative FOMO sentiment.

Stay calm, control the risk, and may a cool head prevail in the current situation. Good luck to all.