Chess, Crypto and the Middle Game

February 27, 2025

When I was a child, my dad taught me how to play chess. My brain almost melted. It’s one thing to understand how the pieces move. It’s yet another to put together a game in a cohesive way. In chess, you have an opening, a middle game, and an end game. If you try to checkmate your opponent in the first 5 moves, you’re usually done. Likewise, a weak middle game will leave few routes to victory. A strong middle game, conversely, provides many options for the endgame – and victory – for the savvy player. Most importantly, chess is a game of patience.

Likewise, participating in these markets is a game of patience. Just like a good game of chess, I argue that, in this bull run, we have a well-developed middle game with lots of factors in motion both positive and negative. I mean, we’ve had a crypto friendly administration elected, followed by tariffs, AI shenanigans, seminal cases dropped by the SEC and states and countries embracing the industry. It’s sometimes hard to put all of this together and see through to the endgame. What is most important however, is that it is our view that this game still favors victory – that is – another strong bull leg this year.

Tariff Troubles

February sure started off with a bang where, on 2/1/25 President trump signed an executive order providing 25% tariffs on Mexico and China.  This initiated what turned out to be a three-day trade war that sent the markets into a huge downdraft at the beginning of the month (actually at end of January.) And it wasn’t just crypto. Stocks like the “Magnificent 7” were down -17% on average. While this seemed to be resolved, this may take a *little* longer to as, just this week Trump noted that the 25% Tariffs to Canada and Mexico will be “on schedule” and go into effect on March 4th. These will then supposedly extend to of 25% tariffs on steel and aluminum and include tariffs on China and perhaps even the EU as well. Markets didn’t like that at all, however, we’re used to this. Overall, we still view this as a negotiation tactic and a temporal item that will lead to short term bumps and does not effect our expectation of a strong 2025 for our markets. But it sure doesn’t help sentiment and, frankly, scared a lot of people. Having said that…

Bull Cancelled? Nope. (It’s a Macro Thing.)

We don’t believe the bull run has been cancelled by any stretch. Every bull run has pullbacks. We’re experiencing one. That’s OK. We’re still tied to global liquidity and as soon as we get over these speedbumps we fully expect to be back to our regularly scheduled run. In fact, this run will be one that we expect to be not just bitcoin strong, but overall strong for other quality “alternative” crypto assets. This is a very consistent pattern, one that we saw clearly in 2021 and one that we expect again.

In fact, there’s a very interesting statistic that I’ve been following. You see, crypto is a worldwide phenomenon largely drive by global liquidity (we’ve discussed this a lot prior.) then we have specific data points and an interesting one is that any time we have capital fleeing China – of which $82 billion did in January – we see a huge jump in the price of bitcoin.

 

We saw this in October 2023, July 2024 which also led to a subsequent doubling in the price of bitcoin. Given this pattern it looks like we expect it again now in 2025. For those inclined there’s a very good ZeroHedge article which, in summary notes:

…don’t be surprised if in the next 6 months Bitcoin doubles again – for the third time in the past year – and the move has little to do with ETF inflows, the halving, a pro-crypto Trump administration, or frankly anything else taking place in the US, and instead is entirely driven by China’s massive wall of money which at last check was almost 3x bigger than the US…

If this holds true it means that we would expect a doubling event to happen for bitcoin (initially) in 2025, then due to the stage of our markets we would expect moves into quality altcoins as this final year of the bull run is traditionally alt-season.

Of course other economic factors need to be considered… and it seems they are falling in line as well. The US Dollar is still too strong as measured by the DXY Index however this month we’ve seen a trend reversal and it’s starting to weaken. It peaked at 109.5 in January but it’s now getting down to 106.5. Once it gets under 106 with a steady trend downward, that’s just what the global economy and the markets need. It’s also worth noting the 10-year treasury has been on a steady decline while, at the same time, we see the ISM metrics – which is the manufacturing index  –  growing. These factors along with a weaker dollar point to economic expansion and provide tailwinds for the next leg of the bull run to begin.

SEC Drops Case vs. Coinbase

On the very positive front, the SEC dropped its case v. Coinbase. The importance of this cannot be overstated. In addition, they dropped the case with prejudice which means that they cannot take up another action in the future. This does a few things. First off, it vindicates CEO Brian Armstrong and the Coinbase team in general. The SEC, under the Gensler administration, argued they were operating as an unregulated exchange. Coinbase argued that this was not the case. The SEC dropping this case is their capitulation and demonstrates in the real shift in their opinion and approach to this industry. Most importantly, it clears the way for the growth of the crypto industry and sets precedent for the other cases which are expected to be dropped. In fact, it looks like the SEC is doing just that and as of this writing abandoning their efforts against Robinhood as well. My opinion is that just like a string of dominoes, over the next quarter most, if not all of these cases will be dropped, and this with set the stage for strong growth of the innovation industry in the US.

Crypto USA

Meanwhile, the US government is prioritizing this industry noted newly minted Crypto and AI Czar David Sacks in his first press conference where he espoused a unified response to crypto regulation. We know the US has a task force, initiated by another first week executive order, that is exploring adding bitcoin and other digital assets to our treasury. This is exceptionally positive but going to take some time. While the fed sets the stage, it looks like a number of states are jumping way ahead  and investing or are at least considering participating in these markets. These include: Alabama, Florida, Kansas, Illinois, Iowa, Massachusetts, Michigan, Missouri, Montana, New Hampshire, New Jersey, New Mexico, North Carolina, North Dakota, Ohio, Pennsylvania, South Dakota, Texas, Utah, Wisconsin and, of course, Wyoming.

Of course, these states are in various degrees of progress, some already allocating while others are in various stages of legislation, but I think the sentiment is clear.

In addition, we have to add in what is happening globally – it’s not just the US looking at this. This last month the Czech Republic proposed adding bitcoin to their balance sheet, while similar proposals are in place in Brazil and Russia. I expect this is just the beginning.

Bye Bye Bybit?

And of course we have some turmoil, this time in the form of an exchange hack to the worlds second largest crypto exchange Bybit. The worlds second largest exchange isn’t going anywhere but they surely got rocked this month, with an approximately $1.4 billion dollar theft of crypto. This was allegedly done by the North Korean Hacker Group Lazarus, who was able to infiltrate Bybit’s systems and, in essence, make approvers think they were approving a valid transaction when, in fact, they were sending assets to another address. What is diabolical here is the hack was able to mask its true intentions to multiple signers, demonstrating a real degree of sophistication. This sends another flare up to all centralized exchanges that no one is immune to theft. On the bright side, however, the crypto community rallied quickly. Summarizing this as a contrast to the traditional banking industry, if a bank were to be hacked for $1.4 billion it would: freeze withdrawals, inform the government, set up a commission, spend years investigating, put customers in a queue, close branches and provide an advantage to competitors. In this case however it was the opposite. The industry united behind the CEO including competitors, everything was operational within an hour and the industry itself it is taking steps to track and where possible resolve the situation. It’s self-regulated. It’s united. And that’s really different (h/t @simplykashif.)  Don’t get me wrong. It was still a huge hack and reminds us we always need to be more careful as this industry evolves. This was eloquently illustrated by those at the Naoris protocol, who noted that web 2 security is no longer going to be sufficient in a web3 world. In any case this cautionary flare is expected to bolster the industry overall and, like any emerging innovation, impel us to grow, be better, and evolve with the technology.

In Closing

Chess is hard. I love the game. And there are times it hurts my brain. There are an incredible number of variables that need to be taken into consideration, and one must patiently build up a game of various options before true victory can take place. Crypto is also hard. There are time it hurts my brain. Every month we have good news and bad news, and with so many variables it’s hard to see 10 moves ahead. But, when we look at the cycles, global macro, past data and overall market structure, we remain incredibly bullish that there is a strong bull sitll in front of us in 2025. So, I encourage you to take a tip from Bobby Fisher.  Don’t rush it. Allow the game to unfold. But most importantly, keep your eye on the ball and prepare for the endgame. It may be 10 moves ahead… but it’s there.

That’s all for now. Until next time be well, stay safe, and I’ll keep Decrypting Crypto for you!

About the author James Diorio

James is a Principal and Chief Executive Officer of Tradecraft Capital.

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