Hello readers,

A little over a year ago, we shared a report titled “Studying MMT to become a better Investor.” It ultimately led to the conclusion below, which turned out to be quite prescient.

The DeFi Report: May 2024

As they say, “even a blind squirrel finds a nut every once in a while.”

With that said. We think a similar set-up is playing out once again, which we outline in this week’s report.

Disclaimer: Views expressed are the author’s personal views and should not be relied upon as investment advice.

Let’s go.

Macro

Hard Data

Our view a few months back was that the deteriorating soft data (surveys) would eventually bleed into the hard data (actual economy).

That view was incorrect. What we are seeing now is that the hard data has remained strong, and the soft data is catching up to that.

May Labor Market: jobless claims came in at 247k (expected 236k). These are historically low in terms of long-term standards.
Payrolls: The economy added 139k jobs in May (130k expected).
May Wage Growth: 3.87% (up from 3.86% in April)
May CPI: 2.4% (2.3% in April). The reading was in line with consensus estimates.
Q2 GDP Forecast: 3.8% (-.2% in Q1)

In terms of soft data, May Consumer Confidence came in at 98 (up from 85 in April).

Add it all up, and you get the chances of recession dropping from 60% at the beginning of May to just 23% today (where it was back in February when the market was peaking).

Data: Polymarket

With that said, continued jobless claims spiked by 54k the last week of May and are now at the highest level since Nov. ‘21.

Data: US Department of Labor

With inflation dropping and the labor market showing some early signs of weakness, this could clear the way for the Fed to start easing later this summer (a similar setup to last year).

Fiscal Dominance

Data: US Treasury

It’s hard to have a recession when the government is printing money into the economy at nearly 2x the rate of tax receipts.

We continue to be in a period of fiscal dominance (DOGE/balancing the budget was revealed as a sideshow), where liquidity will largely come from treasury spending, rather than monetary policy.

A mountain of debt needs to be refinanced in the second half of the year. Policymakers are aware of this. We think they plan to adjust the Supplemental Leverage Ratio (allowing Banks to hold more Treasuries), while also potentially reforming the GSIB surcharge and Basel III capital requirements.

via Joseph Wang

This could free up balance sheet capacity for lending, market-making, repo, and derivatives activities — which is positive for liquidity conditions. Who knows, maybe we’ll see some new, regulated stablecoin buyers as well. We’ll get to that later in the report.

In fact, we are already seeing (anticipatory?) signs of it via the banking sector:

Data: Cross Border Capital

Fiscal Dominance is Spreading Globally

In addition to fiscal dominance in the US, Germany unveiled a multi-year spending increase of 2-3% annually to bolster defense. The EU is considering an $800b defense investment plan. Belgium, Denmark, Estonia, Poland, France, Spain, Sweden, and the Netherlands are also boosting defense spending (some as high as 4%).

Meanwhile, China has boosted fiscal stimulus this year with a substantial budget deficit package aimed at jump-starting growth amid trade uncertainties.

In summary, MMT is the flavor of the day.

Monetary Policy

The Trump Administration seems concerned about rolling over the debts at current interest rates. Interest expense on the debt is currently 3% of GDP. One way to keep it there is to cut the Fed Funds Rate and then refinance the debt at the short end of the curve.

The next FOMC meeting is next June 17-18, with the market pricing no change in rates at 99.8%. A July cut is currently priced at just 30%.

As such, it looks like we’ll have to wait until September at the earliest for any easing of monetary conditions.

Meanwhile…

JUST IN: PRESIDENT TRUMP SAYS HE'S SELECTED A NEW FEDERAL RESERVE CHAIR AND THAT HE WILL BE ANNOUNCED "VERY SOON"
PRINTER IS COMING. #BITCOIN 🚀
— The Bitcoin Historian (@pete_rizzo_)
10:25 AM • Jun 7, 2025

Powell may hold rates. But his replacement? We think he’ll cut. If Trump makes the announcement soon, the markets may turn their attention in that direction (pricing in rate cuts in the process).

If inflation remains under control, the combination of Treasury spending + loosening monetary conditions could create the recipe for another blow-off top later this year.

Crypto Data

BTC Dominance

Data: Glassnode

Bitcoin continues to show strength against the altcoin market, retracing most of the move down from May 7 - May 15 (when ETH broke out).

With that said, over the last five years, BTC dominance has been at or above current levels just 4% of the time.

We think it’s only a matter of time before we see sustained ETH and altcoin outperformance, which historically has coincided with dovish monetary policy and an expansion of the Fed balance sheet.

Long Term Holders

BTC historically hits local or cycle tops when long-term holders start to sell their coins to new market entrants.

We are not seeing any signs of this in the data today. In fact, the long-term holder supply is up 4% over the last three months.

Data: Glassnode

ETFs

In addition to the vote of confidence from long-term holders, the ETFs have seen over $9b of inflows over the last two months. Over that period, there were only seven days of net outflows.

Data: Glassnode

Sentiment

Data: Glassnode

Greed is back on the table, and TradFi is ready to eat. There are now 318 companies holding Bitcoin on their balance sheet and 18 “pure play” Bitcoin Treasury firms. Two prominent new entrants to the strategy include Nakamoto (Jack Dorsey) and Twenty One (Jack Mallers).

In addition to Bitcoin Treasury companies, there are now two companies running the strategy for ETH, and four companies running it for SOL.

Meanwhile, there are currently nine spot altcoin ETF applications with a greater than 75% chance of approval before year-end, according to Bloomberg.

Data: Bloomberg

Finally, the 25x oversubscribed Circle IPO revealed significant pent-up demand for crypto exposure (outside of BTC) from TradFi.

The IPO window is opening, which likely has investment bankers on Wall Street salivating.

Add it all up, and we think there is potential for a “TradFi engineered altseason” in the second half of the year.

In particular, we are keeping an eye on ETH — which has outperformed BTC for over a month now. In fact, the ETH ETFs have now seen 18 straight days of inflows ($1.2b), the longest streak on record.

If ETH were to get a sustained, strong bid (tends to happen when the Fed shifts from tightening to loosening), we think it’s likely that the longer tail of (select) altcoins will outperform as well.

Takeaway: keep an eye on ETH.

Crypto Animal Spirits

Is it possible that Wall Street is going to front-run crypto natives this time? DEX volumes and new token issuance on Solana are still significantly below the highs seen early this year. We think hyperliquid (a project we’ll cover soon) may now be pulling some of the energy away from Solana.

Data: The DeFi Report

Risks

Tariff Uncertainty

Negotiations are ongoing, with the current China tariff at 55% (10% reciprocal, 20% fentanyl, 25% pre-existing from 2018). Following the talks in London this week, a tentative framework was put in place to resume rare earth mineral exports from China. Meanwhile, the US offered to reinstate Chinese student visas and ease export controls pertaining to jet engines & ethane.

With that said, nothing is set in stone just yet. The 90-day truce in terms of escalating tariffs expires on August 12 for China (July 9th for the rest of the world). It’s possible we’ll see further extensions for countries negotiating in “good faith,” as Treasury Secretary Bessent has indicated.

Finally, on May 23rd, a federal district court in the US ruled that parts of the reciprocal tariff structure violated the Trade Act of 1974. The tariffs remain in place under a court-issued “stay,” but could ultimately be reduced/eliminated through the appeals process.

We should have clarity on the court’s stance on tariffs by Q4.

Legislation

The GENIUS ACT (stablecoin legislation) has passed crucial procedural votes in the Senate, setting up for a potential full Senate approval. It will still require reconciliation with the House version (STABLE Act) before it makes its way to the President’s desk for signature. The consensus view is that this should happen sometime later this summer, before Congress goes on recess.

With that said, it’s been a painful process for a seemingly slam-dunk win for innovation in the US, growing the network effect of the dollar, creating net new buyers of US treasuries, and new lines of revenue for banks & fintechs.

We think the Trump family’s maze of involvement with the crypto industry is inviting unnecessary pushback from Democrats such as Elizabeth Warren.

This could create additional headwinds for the broader Crypto Market Structure bill, which recently passed through the House Financial Services Committee.

While progress is being made, it’s prudent for investors to consider risks related to the obstruction of these bills by Democrats.

Additional Risks

Leverage (we think the influx of “Treasury” firms into crypto will end in tears at some point)
A hack or bug within a major app or protocol (+ centralization risks related to exchanges)
Escalation of the war in Ukraine
Internal conflict (it’s starting to feel like we are going to see a summer of protest in the US)
Bond Market (if the Treasury is unable to find buyers of the refinanced debt)
Escalation in the Middle East. Israel attacked Iran’s nuclear capabilities last night. We should expect a strong retaliation from Iran. Crude Oil immediately shot up 9%. This is important as it could spark higher inflation and play a role in monetary policy and the health of the economy moving forward.
Are we in the middle of WWIII, and it just hasn’t been announced yet?

Closing Thoughts

The current setup feels similar to last year from the perspective of:

Fiscal dominance (spending is increasing, not slowing)
Labor market + inflation cooling. The Fed responded with three rate cuts last year, starting in September ‘24. Note that we’ll need to keep an eye on oil now due to the turmoil in the Middle East.
Catalysts on the horizon for the crypto markets. Last year, it was Trump + the strategic reserve talks. This year, we have legislation, crypto IPOs, and altcoin ETFs.

Last year we saw BTC chop sideways/down from June through mid-September (and a brief bear market for altcoins). Given that BTC rallied 45% over the last few months, the probabilities point to a similar period of chop/sideways action through the summer months.

We think this is healthy. It could present opportunities to buy the dip, and also strengthen the market for a potential run into Q4 as the Fed starts loosening monetary conditions.

Thanks for reading.

Take a Report.

And Stay Curious.

Disclaimer: Individuals have unique circumstances, goals, and risk tolerances, so you should consult a certified investment professional and/or do your own diligence before making investment decisions. The author is not an investment advisor and may hold positions in the assets covered. Certified professionals can provide individualized investment advice tailored to your unique situation. This research report is for general educational purposes only, is not individualized, and as such should not be construed as investment advice. The content contained in the report is derived from both publicly available information as well as proprietary data sources. All information presented and sources are believed to be reliable as of the date first published. Any opinions expressed in the report are based on the information cited herein as of the date of the publication. Although The DeFi Report and the author believe the information presented is substantially accurate in all material respects and does not omit to state material facts necessary to make the statements herein not misleading, all information and materials in the report are provided on an “as is” and “as available” basis, without warranty or condition of any kind either expressed or implied.

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