The February Edition

By Jianing Wu, Su Young Lee, & Christine Kim

January 2025 was a busy month – Trump’s inauguration, DeepSeek’s launch, and tariff negotiations have brought volatility to the markets. Despite fluctuations, the broad crypto market rose 6.39%, measured by the BGCI benchmark. Bitcoin (BTC) started the month at $93,714 and closed the month at $102,110, rising nearly 9.00%. Ether (ETH) traded mostly flat. With BTC’s stronger performance, however, the ETH/BTC ratio fell to its lowest level in five years, highlighting the ongoing underperformance of Ether and raising questions about the future of the Ethereum Foundation.

001 President Trump Took Office

Trump’s inauguration on January 20 set off a rapid wave of policy shifts, with major changes taking shape within his first week. On his second day in office, he issued a high-profile pardon to Silk Road founder Ross Ulbricht, fulfilling a key promise to the crypto industry. That same day, he appointed Commissioner Mark Uyeda as Acting Chairman of the SEC, who immediately launched a crypto task force led by Commissioner Hester Peirce to define a clear and pragmatic regulatory framework.

Trump’s executive order (EO) on digital assets further cemented crypto as a national priority, laying the foundation for opening up and legitimating access and usage of the blockchain technology to users, investors, and institutions.

We have published a memo outlining the detailed timeline of new crypto policies since President Trump took office, which you can refer to here.

However, the most dramatic shift came with the SEC’s transformation under Trump’s administration, marking a fundamental departure from past policies. On January 23, the SEC issued Staff Accounting Bulletin (SAB) 122, repealing SAB121, which had previously barred banks from custodying client crypto assets. As we’ve written in our investment thesis, this is a historic milestone that could open the floodgates for institutional adoption, enabling the world’s largest brokerages – such as Morgan Stanley’s E-Trade – to move forward with their previously signaled interest in offering crypto trading functionality.

Progress has continued into early February. Earlier this week, crypto czar David Sacks led a press conference with leaders from the House Financial Services Committee, Senate Banking Committee, House Agriculture Committee, and Senate Agriculture Committee, announcing the formation of a bicameral working group dedicated to defining crypto legislation. One of their key focuses will be stablecoins, and in particular assessing the Guiding and Establishing National Innovation for US Stablecoins (GENIUS) Act, introduced to Congress on the same morning by Senator Bill Hagerty.

During the conference, the Bitcoin Strategic Reserve was also discussed, as Trump ordered the creation of a U.S. sovereign wealth fund. Sacks clarified that the proposed Bitcoin strategic reserve would be structured separately – though discussions remain ongoing. Meanwhile, Utah, which introduced a state Bitcoin reserve bill, faces a 45-day deadline to reach a decision.

Further underscoring the SEC’s proactive stance, Hester Peirce released a statement that was exceptionally bullish, outlining the 10 key priorities the SEC is focusing on. Among the most significant are efforts to define the distinction between securities and commodities, allow broker-dealers to custody both crypto asset securities and non-securities, and introduce changes to ETF products that would enable staking as well as in-kind creations and redemptions. The impact of these anticipated changes was already evident, as Nasdaq had filed for in-kind redemptions for the Blackrock iShares Bitcoin Trust (IBIT) on January 27.

002 AI

DeepSeek’s new LLM model sent ripples through global equity markets. The launch of DeepSeek’s R1 AI model, which delivers performance comparable to more expensive alternatives, highlights that competing with tech giants no longer requires billions in investment. 

This breakthrough has the potential to reshape the competitive landscape of AI, as declining compute costs could challenge the prevailing assumption that AI-related capex - including investments in data centers and nuclear energy – will continue to rise. Many companies expected to benefit from increased electricity demand may now face recalibrated expectations.

Among the harder-hit sectors were Bitcoin miners, particularly those that have signed contracts with hyperscalers and AI businesses. Shares of companies such as CORZ, HIVE, HUT, IREN, RIOT, and BTBT – many of which have pivoted toward AI-related ventures – fell. RIOT, for example, announced an AI expansion plan just a week before the DeepSeek-driven selloff. As of January 27, these stocks had collectively lost -22% and remain down -14% relative to their pre-DeepSeek highs.

Beyond the implications for energy consumption and infrastructure spending, this development also raises questions about the AI race itself. Rather than a single dominant player, the evolving AI sector could see a more decentralized leadership, with multiple firms competing rather than one absolute winner.

One day after DeepSeek’s launch, President Trump announced a private joint venture called Stargate, focusing on developing AI technology by building large AI data centers in the U.S. This venture is led by OpenAI, Oracle, and Softbank, with investment fund Emirati investment fund MGX, and spanning partnerships with Microsoft, Nvidia, and Arm. This ambitious effort is designed to anchor AI innovation within the U.S. while strengthening its competitive edge against China. Beyond being a geopolitical race, it also represents a broader battle between open-source and closed-source AI models, making the outcome even more compelling to watch.

Cryptocurrency spot markets, which opened ahead of traditional stock markets, initially reacted negatively but began to rebound before U.S. equities opened. Stocks followed suit, recovering some losses later in the day. However, the broader macroeconomic impact could be more neutral or even constructive longer term. Lower AI costs might drive broader adoption and increased AI spending overall, rather than leading to a decline in investment. If the DeepSeek-driven concerns over AI dominance and investment trends prove to be merely a market correction rather than the start of a bear market, this could present a compelling entry point into both broader and niche technology sectors – especially beyond the historically overvalued Magnificent Seven3 stocks.

[3] Magnificent Seven refers to seven dominant tech companies — Apple, Microsoft, Amazon, Alphabet, Meta, Nvidia, and Tesla — that have played a crucial role in driving market growth. 

003 Tariffs

President Trump’s announcement of new tariffs on China, Mexico, and Canada triggered immediate market volatility, with crypto – trading 24/7 – reacting as the first market to absorb the impact. Over the weekend, bitcoin tumbled to as low as $90,500 before rebounding to $108,000 on reports of progress in delaying tariffs on Mexico and Canada by a month. The sell-off resulted in the largest liquidation event in crypto history, sweeping approximately $2.2 billion from leveraged positions.

However, as the market absorbed the shock, crypto regained footing. The sharp price swings underscore the increasing interconnectedness of digital assets with broader macroeconomic trends. While tariffs themselves are unlikely to have a direct structural impact on crypto markets – given the ease of cross-border transactions and taxation challenges – the broader implications of trade policy could still be material to crypto markets. Renewed inflation concerns have triggered a broader risk-off sentiment and prompted traders to recalibrate expectations for Federal Reserve policy, with the probability of a rate cut by the May FOMC meeting now priced at 29.2%. Although cryptocurrencies lack embedded duration, inflation expectations and monetary policy shifts have historically been significant price movers for bitcoin.

One of the defining macro trades of a potential Trump 2.0 era – particularly in the context of tariffs –has been dollar strength. A stronger dollar, though rarely an isolated event, has previously weighed on cryptocurrency performance as part of broader risk-asset repricing. In the near term, these combined macro pressures could cap further upside in crypto markets, mirroring broader risk-asset dynamics. While digital assets remain largely independent of direct tariff implications, the evolving macro backdrop suggests that crypto's correlation with traditional markets will remain a key factor in price action.

004 ETH/BTC Dynamic

The ETH/BTC ratio fell to a new five-year low over the first weekend of February, triggered by Trump’s aggressive tariff policies and the fear of a global trade war, dropping below a 3-month average of 0.035 to 0.027. This coincides with ETH’s active addresses hitting a year-to-date low, indicating declining network activity and lower transaction volume. At the same time, ETH supply has increased, adding inflationary pressure and further dampening price momentum.

However, ETH ETFs recorded a historic $1.5 billion in trading volume, with net inflows of over $80 million, while BTC ETFs saw net outflows on February 3rd. This surge in ETH interest may have been influenced by Eric Trump’s tweet, stating, “In my opinion, it’s a great time to add $ETH,” as well as Trump’s World Liberty, a DeFi project, accumulating 21,177 ETH tokens.

Despite this boost in ETF activity, ETH still faced significant challenges. Although the broad market was down, ETH took the worst hit, largely due to already weak sentiment leading into the weekend. Community infighting and ETH's underperformance throughout 2024 have weakened its support. Meanwhile, competitors like BTC and SOL continued to outperform.

Unlike BTC, ETH's narrative is not primarily "digital gold," but rather it's the infrastructure or "trust layer" for the decentralized web, facilitating value transfers on the network. This has weakened its appeal during this regime of tightening liquidity and inflationary pressures, where investors have gravitated toward harder assets with stronger store-of-value narratives, like BTC and gold.

What ETH needs and has needed are new buyers specifically driven by usage on-chain. In fact, Ethereum recently raised gas limits for the first time since its proof-of-stake migration, which will allow for higher transaction throughput and improved network efficiency. Going forward, the launch of new Layer 2s (L2s) and more importantly, new apps on these L2s in the coming months are expected to drive revenue on Ethereum and reinforce the chain's value as the hub for Web3. Additionally, Pectra, the next upgrade on Ethereum, anticipated in March or April, could renew interest and activity in apps on Ethereum Layer 1 through code changes that impact L1 UX like EIP 7702.

005 Our Takeaways & Predictions

While January brought a whirlwind of change, February calls for a more measured approach. As new policies take shape and government initiatives unfold, patience will be key.

In the coming weeks of February, investors should pay attention to regulatory developments, tariff impacts, macroeconomic data, and several key catalysts that could shape the market:

• ETF Filings: Currently, there are at least 29 live applications for new crypto-based ETPs, including short and leveraged ETPs. We expect more filings in the coming months as the SEC fosters a more friendly regulatory environment.

• Crypto Companies' Earnings: Coinbase and crypto mining companies such as Marathon Digital Holdings and Riot Platforms are due to report their Q4 2024 earnings. These reports can offer insights into profitability and institutional demand.

• New HPC Deals with Crypto Miners: As miners expand into the HPC market, they have the potential to secure new longer-term contracts, generating more stable revenue streams with strong internal rates of return (IRRs). These contracts could help reduce their cash flow volatility, making mining businesses less dependent on BTC price swings.

• Reshaping the Value of BTC Miners: Additionally, HPC contracts position miners more like data center businesses, which trade at roughly 3x the EBITDA multiples of traditional BTC miners. This transition could reshape how BTC miners are valued, attracting greater investor interest as they diversify beyond mining into the broader HPC infrastructure market.

To learn more about the topics covered in this month's newsletter, contact our team or reach out to your Galaxy representative.

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