After The Surge

by Ryan Shea

After a hectic start to the year, marked by crypto investors driving up the price of Bitcoin to a fresh all-time-high in celebration of the first crypto-friendly inhabitant of the White House, a semblance of calm and stability returned to the asset class during February. At least, that is, for the most part because the month both started off and finished rather badly, and as a result our benchmark Top10 Crypto CTI ended the month down by around 25%.

Beginning with the former, on February 3^rd $240 billion in market value was wiped out in a matter of hours in one of the largest single-day liquidations in crypto history – see chart. Even for an asset class renowned for its high degree of price volatility this was an exceptional move!

Wipe Out – Crypto style

Source: coinmarketcap.com

Liquidity Cascade

With sentiment already skittish after the previous week’s record slump in the stock price of tradfi market darling Nvidia (aka the Deep Seek Freak… Out), which saw some contagion into AI related tokens, investors displayed a trigger happy response to President Trump keeping another of his campaign pledges, namely introducing tariffs on a series of imported goods. The move, which is straight out of the Trump’s tough-man negotiating playbook, aims to use the economic muscle of the US to coerce other countries into implementing policies more in accordance with the objectives and desires of the new administration, but the worry for investors was that it could trigger a global trade war. Combined with the excessive leverage deployed by bullish crypto investors positioning themselves to take advantage any Trump bounce, the initial knee-jerk selling on the back of the tariff announcement swiftly transformed into a much more wealth destroying liquidation cascade.

Source: imgflip.com/memegenerator

Tit-For-Tat Tariffs

Two countries initially targeted by Trump’s tariffs were Canada and Mexico, who the current administration consider have been less than good neighbours over the past several years. After both acquiesced to his demands to tighten up border security¹, President Trump decided to postpone the implementation of tariffs. However, he went ahead and imposed a 10% tariff on Chinese imports. This sparked a tit-for-tat exchange with the Chinese announcing retaliatory tariffs on many US products, which Trump in turn responded to by imposing a 25% tariff on US imports of steel and aluminum.

Trump’s decision to go after China is hardly unprecedented. During his first term in office he announced a 30% tariff on all imported solar panels, but given the overwhelming majority of those came from China it was pretty obvious who the intended target was and in response China imposed retaliatory tariffs on numerous US products. This escalatory process continued until 2020 when Trump was voted out of office. What is different this time around is that Trump’s focus extends well beyond China, numerous other countries are in his cross hairs including the EU.

Echoes Of The 1930s

The reason why this tariff tit-fot-tat process is so concerning to investors – both in tradfi and crypto – is that tariffs constitute a negative aggregate supply on the economy, which is economic speak for saying they have have detrimental – potentially very detrimental – impact both on real economic activity and inflation.

One of the most famous examples of such policies being implemented was the 1930 Smoot-Hawley Tariff Act. It introduced 900 tariffs on goods imported into the US, and just like now, this protectionist trade policy triggered a wave of retaliatory measures from many of the nations targeted by the US tariffs. In the view of most mainstream economists the Smoot-Hawley Act significantly exacerbated the economic tailspin we have come to call the Great Depression.

For those of you unfamiliar with economic history, US equity prices tumbled more than 80% peak-to-trough in the first few years of the Great Depression between 1929 and 1932, while US house prices slumped 67%. No matter how deflationary the monetary policy of your cryptocurrency of choice is, it will be simply impossible to avoid heavy price declines – and concomitant wealth destruction – were such a negative economic scenario to materialize. Indeed, such is the magnitude of losses associated with such an outcome that even a modest uptick in the probability of it occurring can have a non-negligible impact upon market prices, and that is what we have seen playing out in February.

Powell On Pause

Speaking of monetary policy, because tariffs impinge economic growth while simultaneously boosting inflation their introduction is very problematic for US central bankers to deal with. This was a point iterated by Fed Chair Powell during his testimony to Congress last month. Indeed, combined with the last CPI inflation print confirming that core inflation has stabilized over the past six months almost a full percentage point above the Fed’s 2% target rate, investors have become increasingly accustomed to the notion that the Fed rate cutting cycle is on hold for a prolonged period. According to the CME Fed Watch tool, which monitors US interest rate futures to determine the implied probabilities of Future FOMC interest rate decisions, no cut is priced-in as a base case until the end of July – see chart.

Market Expectations of Fed Policy By End-July 2025

Source: CME Fed Watch Tool

That said, depending how other countries decide to respond to the Trump tariffs, investors may have to begin to consider the possibility that the Fed’s easing cycle has already run its course and that the next move in the Fed Funds rate will be upwards. We are not at this stage yet, but what is clear is that shifting expectations about Fed policy have not provided much of a fillip to investor sentiment nor risk appetite over the past month and, as such, there has been insufficient incentive to discourage traders who benefited from the earlier run up in crypto prices from taking profits.

ByBit Hack

The other factor that damaged sentiment towards the end of February was much more crypto specific, namely the $1.4bn hack of ByBit, the second largest centralized exchange after Binance. On February 21 the exchange’s CEO Ben Zhou, confirmed that hackers – later identified by blockchain investigator ZachXBT to be the North Korean Lazarus Group (see image below) – managed to gain access to one of the exchanges cold ETH wallets and were able to manipulate a regular transfer to the exchange’s hot trading wallet enabling them to drain the 401,000 ETH that was stored in the offline wallet. Even though Zhou assured Bybit clients that their assets would continue to be backed 1:1 and that the exchange remained solvent after the firm secured large ETH deposits from other large crypto players and via emergency loans, the news clearly spooked ByBit users with more than 500,000 withdrawal requests processed in the couple of days following the announcement. You can read more on the Bybit Hack here.

The Hackers

Source: X

ETF Watch

Despite the confluence of negative factors last month, which weighed on crypto asset prices, companies in the industry continue to position for increased institutional interest. One of the more visible signs of this was Grayscale Investments, who submitted an application to launch a Cardano ETF on the New York Stock Exchange. The news provided the ninth largest cryptocurrency by market cap with an immediate 12% boost, a gain that benefited not only our Top10 Crypto CTI, which has Cardano as a constituent, but also our recently launched Cardano Ecosystem ETF CTI.

Cardano was not the only cryptocurrency caught up in the SEC ETF listing price bump last month. Ripple’s XRP also rallied, gaining more than 14% in reaction to the SEC acknowledging applications for an XRP ETF from Grayscale and the NYSE. Assuming the SEC appeal against last year’s US court ruling that found XRP sales to retail investors did not constitute securities transactions is either dismissed or settled (quiet possible given the change of leadership at the SEC following Gensler’s resignation last month), the path towards listing should be relatively clear. Boosting such hopes were media reports that Hashdex had secured approval to launch Brazil’s first spot XRP ETF.

The expectation of those companies seeking ETF listings is that they will be able to repeat the success of the earlier Bitcoin and Etheruem ETFs, who have managed to accrue over $116bn and $10bn in AUM in barely more than a year – the fastest pace of adoption ever seen in the ETF space – see chart – even allowing for the recent heavy outflows.

Bitcoin ETF AUM (USD bn)

Source: Coinglass

Sovereign Stakes

One company that has emerged as one of the more notable holders of such products is Mubadala Investment Company. What makes this company interesting is not so much the amount of assets invested– although their $460mn stake makes them the seventh largest holder of BlackRock’s iShares Bitcoin Trust – but that it is one of the sovereign wealth funds of Abu Dhabi, the largest of the seven emirates that make up the UAE. According to their website, Mubadala has more than $27bn in assets under its control, meaning that its Bitcoin ETF holdings constitute less than 2% of its overall holdings. But consider this, its big brother, the Abu Dhabi Investment Authority (ADIA) has AUM estimated to be over $1tr, which is more than 40X Mubadala. Just imagine what it would mean to the price of Bitcoin if they decided to invest an equivalent share of their balance sheet into the seminal cryptocurrency²!

A few years back such thoughts would have been dismissed as pie-in-the-sky but not any more, which is testament as to how far crypto has come as an asset class in a relatively short period of time – something we in the industry often overlook, especially when crypto prices aren’t mooning.

1 Trump surely took their capitulation as evidence that economic coercion works.

2 Disclaimer: I am a former ADIA employee and even pitched Bitcoin as an interesting investment opportunity at an internal conference back in June 2013!