ALTERNATIVE MARKETS UPDATE – MID MAY 2025

​Since President Trump announced a pause on tariffs in early April 2025, equity markets have rallied significantly. As shown in Figure 1, the S&P 500 rallied by more than 15% in the past five weeks and closed last week with a positive performance in 2025. Despite this rally, market participants remain hesitant, as uncertainties regarding the long-term effects of tariff policies linger. Goldman Sachs, while acknowledging the positive momentum, still projects a significant chance of recession, having recently reduced their recession probability from 45% to 35% following the tariff pause and recent trade developments.

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RESEARCH PERSPECTIVE VOL. 251 May 2025 Alternative Markets Update Since President Trump announced a pause on tariffs in early April 2025, equity markets have rallied significantly. As shown in Figure 1, the S&P 500 rallied by more than 15% in the past five weeks and closed last week with a positive performance in 2025. Despite this rally, market participants remain hesitant, as uncertainties regarding the long-term effects of tariff policies linger. Goldman Sachs, while acknowledging the positive momentum, still projects a significant chance of recession, having recently reduced their recession probability from 45% to 35% following the tariff pause and recent trade developments. Figure 1: S&P 500 in 2025, Source: Investing, May 2025 Nevertheless, there are many reasons to be optimistic about equities at present. The recent agreement between the United States and China to lower tariffs has eased trade tensions and has significantly eased the fear of US companies and consumers of soaring inflation. Trump’s visit to the Middle East has also led to substantial investment commitments in the US, which are expected to support economic growth. Market participants, however, remain cautious and are looking for concrete trade deals, to ensure that the tariff pause leads to long-term stability and does not shock markets when the temporary suspension ends. This notion will be crucial to sustain the ongoing rally. While early efforts have been successful with a trade deal with the UK, further deals in the coming weeks are vital to boost investor confidence. While the initial tariff announcements raised significant concerns, inflation has continued to cool, though it remains uncertain whether this trend will persist as inflation could rise again. Similar to investor confidence, trade deals need to be agreed upon quickly that the proposed tariffs do not come into effect. Despite earlier expectations of rate cuts in June, the expectations have now shifted the timing to September, though two cuts are still anticipated for the remainder of the year, providing further support for equities. Despite being a risk-on asset, cryptocurrencies lost less than equities when tariffs were initially announced. Given their historical volatility, this is somewhat surprising, but it makes sense as cryptocurrencies are only affected by tariffs to a negligible degree. As consumer confidence improved substantially following the tariff pause, the subsequent rebound positively impacted the crypto market as well. Bitcoin surged by approximately 30%, nearing its peak for 2025, as Figure 2 highlights. With the latest rebound, Bitcoin also soared beyond $100k for the first time in three months. In addition to this major benchmark, the cryptocurrency industry also made significant strides in public markets over the past few weeks. Coinbase will join the S&P 500, while Galaxy is joining the Nasdaq, and eToro has completed its IPO. Institutional adoption is also rising, with J.P. Morgan celebrating its first transaction on a public blockchain via Ondo Finance and Chainlink Labs. In contrast, Ethereum significantly underperformed other major cryptocurrencies throughout 2025, falling nearly 60% year-to-date at its lowest point. Even during the market rebound, Ethereum’s recovery remained limited. Ethereum’s sharp gains in May 2025 are attributed to its most recent “Pectra” update. The upgrade brought substantial improvements to Ethereum’s usability, scalability, and staking infrastructure. The upgrade included an increased maximum stake for validators, allowing externally owner accounts to temporarily function as smart contracts, which allow for transaction batching among other features, and brought about flexibility to the staking infrastructure. In the market decline starting in February, Solana fell to similar lows as Ethereum did. In contrast to Ethereum, Solana managed to rebound strongly following the tariff pause. Solana’s fundamental data has proven to be quite strong and has overtaken Ethereum as the most active blockchain in terms of overall development. This shift also contributed to the poor performance of Ethereum. Despite this positive news, Solana is down more than 10% and Ethereum fell more than 20% compared to the beginning of 2025. Figure 2: Performance of Bitcoin, Ethereum and Solana in 2025, Source: CoinMarketCap, May 2025 With lower losses than equities during Liberation Day, Bitcoin is showing that its historical volatility is declining substantially. As a limited resource due to its mining process, it is once again being compared to gold. Bitcoin ETFs now hold $96bn in cryptocurrencies, while US gold ETFs hold slightly more at $158bn. With clearer crypto regulation on the horizon in the US alongside a potential Bitcoin reserve, the outlook for Bitcoin is promising. With arguably a more predictable supply than gold, Bitcoin has a lot of room to gain, as current US Bitcoin reserves are $16bn compared to the $720bn that the US holds in gold. Figure 3 highlights three charts indicating extensive growth for Bitcoin. Figure 3: Bitcoin as Digital Gold vs. Traditional Gold, Source: Pantera Capital, March 2025 Following the origin of cryptocurrencies as alternative sources of money, payment systems are vital for the industry’s continued growth. In this ecosystem, stablecoins are the driving force. The total market capitalization of stablecoins has now surpassed $230bn, which is slightly less than Ethereum’s total market capitalization. Figure 4 breaks down the four major ways in which cryptocurrencies are separated within the payment space. The Merchant Layer focuses on applications that allow retail or business transactions. Applications in this area focus on cryptocurrency wallets and infrastructure for cross-border transactions. Stablecoin Orchestration focuses on crypto-to-fiat on- and off-ramps and stablecoin cross-border transfers. This sector is vital for using cryptocurrencies, as fiat money and cryptocurrencies need to be easily exchanged for one another. Typically, this is done by transforming fiat money into a stablecoin that is pegged to the fiat currency. The stablecoin can then seamlessly be used in the cryptocurrency environment. FX and Liquidity constitute the third layer of payment systems in the crypto space. These providers facilitate the exchange between stablecoins in different currencies and other stablecoins. Lastly, Stablecoin Issuance providers offer specifically designed stablecoins to companies and protocols. These include white-label stablecoins and yield-bearing stablecoins, among other types. Figure 4: The Crypto Payments Stack, Source: Pantera Capital, May 2025 STONE MOUNTAIN CAPITAL Stone Mountain Capital is an advisory boutique established in 2012 and headquartered in London with offices Pfaeffikon in Switzerland, Dubai and Umm Al Quwain in United Arab Emirates and Tallinn in Estonia. 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