Market View
Both crypto and broader risk markets have held up relatively well despite President Trump following through on his threat of tariffs this week. In part, that reflects the reprieve negotiated with Canada and Mexico, though the escalation with China has added to general investor uncertainty and market volatility. It’s as of yet unclear how the Federal Reserve might react to potential price pressures, as the scenario is still path dependent on whether importers decide to absorb tariff costs or pass these costs onto consumers. There’s also significant speculation on whether more tariffs may be coming, as well as where and when, which could ultimately affect inflation expectations.
Within crypto, ETH’s relative underperformance continues, though flows to US-based spot ETH ETFs have been more than double those of spot BTC ETFs ($409M vs $173M) in the first week of February. We think these outsized ETH ETF flows reflect the opportunities in the CME basis trade as well as a potential divergence of sentiment towards ETH between traditional financial players and crypto native ones. Between November 1, 2024 and February 6, 2025, CME ETH futures open interest increased from 352K ETH to 1.13M ETH based on CoinMetrics data.
This has largely been driven by inflows to leveraged ETH futures ETFs, in our view, which have primarily centered around the Volatility Shares 2x Ether ETF (ETHU). In contrast, leveraged BTC futures ETFs have seen net outflows over the same period. CME BTC futures have also not seen a comparable open interest increase, with CME open interest remaining mostly unchanged (173K BTC on November 1, 2024 to 169K BTC on February 6, 2025).
The pickup in both spot and leveraged ETH ETF inflows has notably followed positive comments from Eric Trump about ETH alongside purchases by the World Liberty Financial project. At the same time, the liquidation-driven move lower brought the ETH/BTC ratio below 0.025 for the first time since 2020, which may have been perceived as a buying opportunity for certain market participants.
It’s notable that the CME ETH basis trade has continued to return higher annualized yields compared to the CME BTC basis trade over the past week. The basis trade may be another reason why we’ve seen outsized inflows to spot ETH ETFs recently.
The CME basis opportunity stands in contrast to perpetual futures funding rates which have flipped negative for ETH while remaining positive for BTC. Given that perpetual futures products are predominantly traded on centralized exchanges domiciled outside of the US, we think that the cohort trading these instruments tend to be more crypto native. In our view, ETH’s lower funding rates may suggest weak ETH sentiment because negative funding rates are the result of perpetual futures prices trading below spot for a prolonged period. Indeed, this reflects our previous ETH observations driven by the rapid progress of competitors like Solana.
Meanwhile, the US Treasury released its Quarterly Refunding Program with no intended change to its borrowing plans for the next few months, which means any updates will likely be pushed back to 2H25, in our view. Recall that the US has been front-loading its borrowing for some time by issuing more short-duration T-bills (rising from 12% to 21% of the debt supply over the last decade), leaving it potentially more vulnerable to refinancing at higher interest rates. The question now is whether we could see more unfunded deficit spending in the US, with Congress’s non-partisan Government Accountability Office projecting debt-to-GDP could double to 200% by 2047. These could provide the broader macro underpinnings behind greater strategic bitcoin ownership in the long run.
Onchain: Uniswap v4
The macro headlines and subsequent market volatility has overshadowed other major technical developments occurring onchain. In particular, Uniswap V4 launched across 12 different chains, representing a major step forward in programmatic extendability of decentralized exchange (DEX) pools via its “hook” architecture. That is, liquidity pools can be created with additional functionality such as wallet checks or fee allocation towards token buybacks. Uniswap V4 additionally lowers the cost to create a pool, enables more efficient routing in swaps, and supports native ETH. While a major step forward, we also think it will take at least several months for Uniswap V4 to surpass its current V3 version based on its previous release history.
Uniswap V3 launched in May 2021 and did not surpass Uniswap V2 in total value locked (TVL) until January 2022. And while V3 volumes surpassed V2 volumes within a month of launch, that was in large part due to the massive increase in capital efficiency from V3’s concentrated liquidity provisioning feature. Uniswap V4 does not have that same qualitative change in capital efficiency that would drive huge volume shifts, in our view, but rather relies on creative hook implementations to drive adoption. It may also take some time for liquidity providers to parse through the security risks and new pool interfaces before deploying capital in size. As we go to publish, Uniswap V4 has $51M in TVL a week after launch. (Uniswap V3 has $3.3B)
