The war in Iran has now passed the one-month mark and the markets seem to be waking up to the reality.
To understand where things could go in the second quarter, it’s helpful to look at where the markets are today. From a technical perspective, the past month has been marked by pure volatility, fueled by a few key moves: oil prices surged more than 50%, U.S. Treasury yields rose about 13%, while gold fell almost 15%.
Against this backdrop, the crypto market’s 0.5% correction appears relatively tame, suggesting that risk assets have held up well so far. But is this resilience now beginning to be tested? Looking at the chart below, this scenario doesn’t seem too unlikely.
According to the Kobeissi Letter, the Federal Reserve no longer anticipates rate cuts until December 2027. Instead, expectations have shifted to a 51% chance of a rate hike by March 2027, a sharp turnaround in sentiment in just four weeks, reflecting how quickly macroeconomic conditions have changed.
Naturally, the question becomes: what is driving this change? As The Kobeissi Letter founder pointed out, with oil and gas prices rising, their models suggest that U.S. CPI inflation could climb as high as 3.5%, or about 150 basis points above the Fed’s long-term target.
In this scenario, the argument leans toward tightening monetary policy, meaning the Fed would lean more toward rate hikes than cuts. For crypto assets, which have thus far behaved as a hedge against inflation, this raises a key question: can they continue to deliver this narrative as markets rapidly reassess interest rate expectations?
Q2 begins with crypto markets facing a reality check
Compared to Q1’s average ROI of 45%, Bitcoin’s (BTC) Q2 return is closer to 28%.
Historically, crypto markets have tended to slow down in the second quarter after better performance in the first quarter. However, the 2025 cycle broke this trend, with BTC posting gains of around 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 arises: while BTC has already corrected almost 25% in the first quarter, could the markets be preparing for a development similar to that of 2025? This is particularly where changing interest rate expectations start to matter. Sentiment clearly shows that investors are reassessing risk, with the Crypto Fear & Greed Index having fallen 10 points in less than a week and now sitting just three points from “extreme” fear territory.
Meanwhile, the impact is also starting to show on-chain.
As the chart above shows, around 21,700 BTC from short-term holders flooded onto exchanges in the past 24 hours, all sold at a loss, indicating increasing panic-driven selling pressure. Combined with weak institutional supply, this suggests that the current crypto correction is more than just a routine pullback.
Instead, capital appears to be moving defensively, with smart money reducing exposure as fear returns to the market, especially as the likelihood of rate hikes continues to rise, a backdrop that has historically weighed on crypto performance.
Against this backdrop, a 2025-style recovery seems increasingly unlikely, as the current move looks less like a healthy reset and more like an early transition into a broader bearish phase.
Final Summary
- Inflation is causing markets to reassess rate hikes, challenging crypto’s inflation-hedging narrative.
- Panic selling, declining market sentiment, and weak institutional demand suggest that the current correction may transition from a reset to an early bear market.
