The Iran war has now passed the one-month mark and markets appear to be waking up to a reality check.
To understand where things might go in the second quarter, it can be helpful to look at where markets stand now. From a technical perspective, the past month has been pure volatility driven by a few significant moves: Oil prices are up over 50%, US Treasury yields are up around 13%, while gold is down almost 15%.
Against this backdrop, the crypto market’s 0.5% correction appears relatively muted, indicating that risky assets are doing well so far. So is this resilience now starting to be tested? Looking at the table below, this scenario seems unlikely.
According to the Kobeissi Letter, the Federal Reserve is no longer pricing in rate cuts until December 2027. Instead, expectations have shifted towards a 51% probability of a rate hike by March 2027; This created a sharp shift in sentiment in just four weeks, a reflection of how quickly macro conditions are changing.
Naturally, the question arises: What is driving this change? Aspect Founder of the Kobeissi Letter He noted that as oil and gas prices rise, their models show U.S. CPI inflation could climb toward 3.5%, roughly 150 basis points above the Fed’s long-term target.
In this scenario, the argument shifts towards tighter monetary policy, which means the Fed will turn to interest rate hikes rather than cuts. For cryptoassets that have so far acted as inflation hedges, this raises an important question: Can they continue to maintain this narrative as markets rapidly reprice interest rate expectations?
The second quarter begins as crypto markets face a reality check
Compared to the first quarter’s average return on investment of 45%, Bitcoin (BTC) Second quarter returns are approaching 28%.
Historically, crypto markets have tended to slow down in the second quarter after stronger first quarter performance. However, The 2025 cycle broke this patternBTC gained nearly 30% in the second quarter after a -12% correction in the first quarter, marking the first such reversal since the 2020 market cycle.
Naturally, the question now becomes: With BTC already correcting by around 25% in the first quarter, can markets prepare for a similar 2025-style move? This is where changing interest rate expectations in particular start to become important. Sentiment clearly shows that investors are re-pricing risk. Crypto Fear and Greed Index It has fallen 10 points in less than a week and is now just three points away from the “extreme” fear zone.
Meanwhile, the impact is starting to be seen on-chain as well.
As the chart above highlights, approximately 21,700 BTC from short-term holders flowed into the exchanges in the last 24 hours, all of which were sold at a loss, indicating increased panic-induced selling pressure. Paired with a weak corporate offerThis suggests that the current crypto correction is more than a routine pullback.
Instead, capital appears to pivot defensively; Smart money is reducing risks as fear returns to the market, especially as the possibility of a rate hike continues to increase; This is a backdrop that has historically weighed on crypto performance.
In this context, a 2025-style Q2 rally looks increasingly unlikely, as the current move looks more like an early transition into a broader bear phase rather than a healthy reset.
Final Summary
- Inflation is forcing markets to reprice rate increases, challenging cryptocurrency’s inflation hedge narrative.
- Panic selling, falling market sentiment, and weak institutional demand suggest the current correction could slide from a reset to an early bear market.
