The war in Iran has now crossed the one-month mark and the markets seem to be waking up for a reality check.
To understand where things could go in the second quarter, it helps to look at where the markets currently stand. From a technical perspective, the past month has been pure volatility, driven by a few key moves: oil prices are up more than 50%, US Treasury yields are up about 13%, while gold is down almost 15%.
Against this backdrop, the crypto market’s 0.5% correction appears relatively muted, suggesting that risky assets have held up well so far. But is that resilience now being tested? Looking at the chart below, that scenario doesn’t seem that unlikely.
According to The Kobeissi Letter, the Federal Reserve is no longer pricing in rate cuts until December 2027. Instead, expectations have shifted to a 51% probability of a rate hike in March 2027, a sharp sentiment shift in just four weeks that reflects how quickly macro conditions have changed.
The question naturally arises: what is driving this shift? Like the founder of The Kobeissi Letter As noted, their models suggest that with oil and gas prices rising, U.S. CPI inflation could rise to 3.5%, about 150 basis points above the Fed’s long-term target.
In that scenario, the argument shifts to tighter monetary policy, meaning the Fed will tend toward rate hikes rather than cuts. For crypto assets, which have thus far acted like an inflation hedge, this raises an important question: Can they continue that narrative as markets rapidly revise interest rate expectations?
The second quarter starts with a reality check on the crypto markets
Compared to Bitcoin’s average ROI of 45% in the first quarter [BTC] The return in the second quarter is closer to 28%.
Historically, crypto markets have tended to slow down in the second quarter after stronger performance in the first quarter. However, the The 2025 cycle broke this patternwith BTC posting a gain of around 30% in the second quarter, following a -12% correction in the first quarter, marking the first such reversal since the 2020 market cycle.
The question now naturally becomes: With BTC already correcting almost 25% in the first quarter, could markets be preparing for a similar 2025-style move? This is particularly the point where shifting interest rate expectations start to matter. The sentiment clearly shows that investors are re-pricing risk, with the Crypto Fear & Greed Index Down 10 points in less than a week and now just three points away from “extreme” anxiety territory.
Meanwhile, the impact is also starting to become visible on the chain.
As the chart above shows, approximately 21,700 BTC flowed from short-term holders onto exchanges over the past 24 hours, all sold at a loss, indicating increasing panic-driven selling pressure. In combination with a weak institutional bidthis suggests that the current crypto correction is more than just a routine pullback.
Instead, capital appears to be rotating 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.
In that context, a rally in the second quarter of 2025 looks increasingly unlikely, as the current move feels less like a healthy reset and more like the early transition into a broader bear phase.
Final summary
- Inflation is forcing markets to reassess interest rate hikes, challenging crypto’s inflation-hedge narrative.
- Panic selling, declining market sentiment and weak institutional demand indicate that the current correction may be shifting from a reset to an early bear market.