Original Title: May 2025: U.S. Fiscal Risks Driving Bitcoin Demand

Original Source: Grayscale Research

Original Translation: xiaozou, Golden Finance

· With a dual drive of macro demand and regulatory optimism continuing to boost the crypto bull market, the price of Bitcoin hit a new all-time high in May 2025.

· Investor demand for Bitcoin is partly fueled by U.S. macroeconomic imbalances, including ongoing fiscal deficits. While deficits are not a new phenomenon, the comprehensive tax and spending bill being pushed through Congress is likely to keep the U.S. finances on an unsustainable path.

· U.S. fiscal risks seem to be driving Bitcoin demand, as evidenced by the rise of "Bitcoin Treasury" companies (i.e., publicly traded companies holding Bitcoin on their balance sheets). The valuation premium these companies receive indicates that traditional stock market investors have a keen interest in crypto asset allocation. However, we believe that the "Crypto Treasury" strategy beyond Bitcoin has limitations, as investors will eventually be able to access more allocation channels through spot crypto trading platforms offering Exchange-Traded Products (ETPs).

· This month also saw the following developments: breakthroughs in stablecoin and market structure legislation; decentralized exchange Hyperliquid showing strong performance; blockchain-based identity verification project Worldcoin landing on the cover of TIME magazine.

As the U.S.-China trade tensions temporarily eased, the stock market saw a rebound in May. However, this rally came after three consecutive months of decline, with the S&P 500 index still about 4% below its peak. In contrast to the relatively healthy stock market, the bond market (especially in the high-quality segment) experienced negative returns, seemingly due to government high deficits and corresponding issuance of long-term bonds. According to the market-cap-weighted FTSE Grayscale Crypto Sector Index, the risk-adjusted returns of Bitcoin and the entire crypto asset class were on par with the global stock market (Figure 1). Bitcoin rose by 11% during the month, hitting a new all-time high of $112,000; Ethereum's native token ETH rose by 44%, partially recovering from its previous underperformance against Bitcoin.

Figure 1: Risk-Adjusted Crypto Market Performance in Line with Stock Market

Great Beauty Act

When investors are concerned about the credibility of the fiat currency system, Bitcoin demand often rises. This concern once again became a focus in May. On May 22, the U.S. House of Representatives passed a comprehensive tax and spending bill now formally named the OBBBA (One Big Beautiful Bill Act). Budget experts estimate that if implemented as currently written, this bill would add approximately $3 trillion to the federal deficit over the next 10 years; if certain expiring provisions are extended, the deficit could swell to $5 trillion. If enacted, the bill's fiscal mix would put the U.S. on an unsustainable debt trajectory (Figure 2). Partly due to the direction of U.S. fiscal policy, Moody's downgraded the U.S. sovereign credit rating from AAA to AA on May 16. While the U.S. government is unlikely to default in the short term, the unsustainable debt path will increase long-term risks of macro mismanagement, thereby raising investor interest in non-sovereign store-of-value assets such as gold, Bitcoin, and others.

Figure 2: OBBBA Makes U.S. Fiscal Path Unsustainable

Rise of Crypto Treasury Companies

U.S.-listed spot ETPs can be considered the most significant new source of demand for Bitcoin since its inception. During May, these products continued to see high net inflows, totaling $5.2 billion. In the coming months, the Bitcoin purchases by "Bitcoin Treasury" companies (i.e., publicly traded companies purchasing Bitcoin for their balance sheets) may match or even exceed the purchases of spot Bitcoin ETPs. Enterprise Bitcoin investment pioneer Strategy (formerly MicroStrategy) increased its Bitcoin holdings by around 27,000 coins in May (approximately $2.8 billion). Strategy's market value far exceeds the value of Bitcoin on its balance sheet, indicating a market demand premium for gaining Bitcoin exposure through equity instruments (Figure 3).

Figure 3: Strategy Market Value Premium Relative to Its Bitcoin Holdings

As the stock market pays a premium for Bitcoin in this structure, more companies are adopting this strategy, with some expanding it to assets beyond Bitcoin. For instance, a consortium composed of Tether, Bitfinex, and SoftBank created Twenty One Capital, which initially holds 42,000 bitcoins (approximately $4.4 billion), primarily provided by Tether. Similarly, Bitcoin Magazine CEO David Bailey transformed the existing publicly traded company KindlyMD into a Bitcoin Treasury company named Nakamoto Holdings. The company plans to issue approximately $700 million in stocks and convertible bonds in the U.S. market to purchase Bitcoin, with plans to replicate this strategy in other countries worldwide. Lastly, Trump's social media app Truth Social's parent company Trump Media & Technology Group announced a raise of $2.5 billion to allocate to Bitcoin on its balance sheet.

In addition to Bitcoin, SharpLink Gaming has announced its transformation into an Ethereum Treasury Company with backing from crypto investment firms such as ConsenSys (Figure 4). Other entrepreneurs have further expanded this model, creating crypto treasury companies for Solana (Upexi), XRP (VivoPower), and even Trump-themed meme coins (Freight Technologies). The proliferation of crypto treasury companies indicates investor keen interest in exposure to crypto assets traded on traditional exchanges. However, the eventual widespread adoption of spot crypto ETPs may limit the demand for crypto treasury companies as ETPs can more efficiently track the prices of underlying tokens.

Figure 4: Proliferation of Crypto Treasury Companies

Digital Asset Legislation

On the legislative front, the White House and Congress continue to advance U.S. digital asset regulatory efforts. On May 5, the House Financial Services Committee and Agriculture Committee jointly released a draft of the "Digital Asset Market Structure Act" — a comprehensive financial services legislation akin to regulatory milestones like the Dodd-Frank Act or Sarbanes-Oxley Act. The House is scheduled to hold a hearing on the updated draft on June 4. Additionally, the "GENIUS Act" ("Guiding and Encouraging New Digital Stablecoin Innovation in the United States Act") received bipartisan support and passed a Senate cloture vote on May 19, poised for amendments. While both bills have several stages to clear before becoming law, recent progress and bipartisan support signal a positive outlook for their eventual passage.

Since the U.S. presidential election in November last year, the prospect of a clarified regulatory framework seems to have catalyzed institutional investors' increased exposure to the industry. This trend continued in May, manifesting in significant transactions and/or policy adjustments. Notably, Coinbase made a $2.9 billion acquisition of the crypto options specialist platform Deribit, marking the largest acquisition deal in industry history. Coinbase also joined the S&P 500 Index this month, currently ranked 187th. Its competitor Kraken (also active in acquisitions) announced the launch of tokenized stock services in non-U.S. markets, while Robinhood indicated its acquisition of the Canadian crypto platform WonderFi. Other notable institutional moves include Brown University disclosing its bitcoin ETP holdings, New Hampshire passing legislation allowing public funds to invest in crypto assets, and Morgan Stanley planning to introduce crypto trading services in its E-Trade offering.

ETH and Token Performance

Ethereum (ETH) significantly outperformed Bitcoin in May, but part of the reason is the timing of the analysis: since the beginning of 2023, Ethereum's price trend has been largely in sync with the "smart contract platform" crypto sector (Figure 5). We expect smart contract platforms to benefit from US regulatory reforms, which will drive broader adoption of stablecoins, tokenized assets, and decentralized finance—all of which rely on smart contract platform infrastructure. Although this is a competitive segment in the crypto market, Ethereum has advantages such as a large on-chain capital scale, a culture of decentralization, a focus on network security, and neutrality. However, the price of ETH tokens needs more support from Ethereum's mainnet (Layer1) activity growth rather than activities on numerous L2 networks (Layer2). Although the Pectra upgrade implemented in May brought beneficial improvements, it will not immediately boost mainnet activity.

Figure 5: Ethereum's Performance is Largely in Sync with Its Crypto Sector

Despite ETH's strong performance during the month, the most notable performer among assets with a market capitalization exceeding $5 billion was Hyperliquid's HYPE token. Hyperliquid is both a professional decentralized perpetual contract exchange (DEX) and a general-purpose smart contract platform. The chain's Hypercore product currently accounts for over 80% of on-chain perpetual contract trading volume. During May, Hypercore's perpetual contract trading volume exceeded $17 billion, and by the end of the month, its daily revenue even surpassed the three largest smart contract platforms—Ethereum, Tron, and Solana (based on fee revenue). Last year, the protocol set a record for the largest airdrop in crypto history—worth over $8 billion at current prices—prompting the entire industry to rethink tokenomic and funding models without VC support. Hyperliquid always maintains high organic utilization and strong liquidity, and in the future, it will increasingly compete with centralized derivative trading platforms like Binance and Bybit.

Figure 6: Hyperliquid Fee Revenue Surpasses Top Smart Contract Platforms

AI Crypto Sector Performance

With the rapid development of blockchain AI technology, Grayscale Research recently added an "Artificial Intelligence (AI) Crypto Sector" to our crypto industry classification framework, becoming the sixth largest standalone sector. Currently, this sector includes 20 tokens with a total market value of around $20 billion (Figure 7).

Figure 7: Current Market Value of the Artificial Intelligence Encryption Sector is Approximately $200 Billion

Projects in this sector that have recently made significant progress include Worldcoin—this identity network founded by Sam Altman aims to establish a "proof of personhood" system to address the growing challenge of human/robot identification in the AI era. This month, Worldcoin announced a major milestone: a $135 million fundraising through a public market acquisition of WLD tokens by a16z and Bain Capital Crypto. The project has garnered widespread attention through initiatives such as landing the cover story of Time magazine, promoting the iris scanning device "Orb" in the U.S. market, and launching the encrypted wallet World App. Other significant developments in the blockchain AI field include the increasing visibility of the Bittensor subnetwork and the revelation by top stablecoin issuer Tether of plans to launch an AI smart agent network based on a crypto-native architecture.

In the coming months, the crypto market is likely to continue its current driving factors: Bitcoin's macro demand driven by stagflation risks and tariff uncertainties, ongoing improvements in the U.S. and international regulatory environment, and technological innovations in blockchain AI and other areas. This asset class has performed well over the past two years, and the supportive factors for fundamental improvement still exist.

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