IN THIS ISSUE

🏦 The first Bitcoin bank
💵 STX/USDh listed on Velar
💰 USDh yield recap
☎️ Hermetica Hangout: Maestro
📈 Weekly market review

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The First Bitcoin Bank

Early Bitcoin pioneer Hal Finney envisioned a future where Bitcoin would underpin a new financial system, acting as "high-powered money" for banks issuing Bitcoin-backed digital cash – a true Bitcoin Standard.

Hermetica is making this vision a reality. Our mission is to enable global financial freedom through a Bitcoin-based financial system, starting with USDh: the first dollar built on the Bitcoin Standard.

Read the full article now.

STX/USDh Live on Velar

STX/USDh trading pair is now available on Velar, the first Bitcoin-native PerpDEX.

Traders can now go long or short on STX using USDh as collateral, and yes, you still earn 5% yield on the collateral while trading.

This is the second USDh pair on Velar, further cementing USDh’s role in powering Bitcoin-native leverage, liquidity, and on-chain trading infrastructure.

USDh Yield Recap

Crypto flashed green and suddenly the timeline was partying like it’s alt season.

Meanwhile, USDh stakers have been in their own private bull run for weeks now, stacking yield. This week’s yield came in at 9% APY.

Hermetica Hangout: Maestro

This week on Hermetica Hangout, we hosted Maestro to learn how they’re powering multichain DeFi across Bitcoin and Cardano, making it easier for developers to build in UTXO-based ecosystems.

We have another Hangout next week – stay tuned.

Market Review

Bitcoin's parabolic rise persists following its breakout from a four-month downtrend two weeks ago. There was a notable increase after Wednesday's FOMC meeting. While perpetual funding rates increased this week, other derivatives rates, including basis spreads and options premiums, saw slight decreases across the curve, particularly at the short end of the futures curve. A falling short end often indicates reduced immediate spot demand; understandable given the rapid price surge over the past three days. Funding rates remained positive throughout the week, peaking at an annualized 26% on Friday morning. The average equal-weighted basis spread narrowed by 1.23%, from 7.78% to 6.55%; excluding weekly contracts, the basis APR still fell by 1.09%. Meanwhile, Bitcoin's implied volatility (DVOL) is trending back towards recent lows and currently sits at 45.47%.

Aggregated altcoin market caps rose week-over-week from $1.04T to $1.17T. Bitcoin dominance decreased 2.54%, marking the first weekly decline in several weeks. Although Bitcoin dominance remains in a multi-year uptrend, a continued decline over the next month could foreshadow an altseason. The long Bitcoin/short altcoin trade, a top performer with low volatility over the last two and a half years, may face a changing market dynamic.

The moving averages (MA) in Figure 1 are:

• 7-Day MA: $97,886

• 30-Day MA: $91,256

• 180-Day MA: $93,287

• 360-Day MA: $78,628

• 200-Week MA: $46,813

Bitcoin's price is currently trading significantly above its key moving averages this week, following a breakout from a three-month downtrend a few weeks ago. The upward acceleration saw Bitcoin breach the $100,000 level on Thursday. Bitcoin is trading 5.38% above its 7-day moving average, 13.04% above its 30-day moving average, and 10.58% above its 180-day moving average. This marks the most significant extension of Bitcoin's price above these moving averages seen since late last year. While such extended moves can persist for several weeks in a strong trend, they historically result in short-term price correction.

Trend Following

Returns for a Bitcoin 7-day and 30-day long trend following portfolio remain 8.4% below the local highs recorded in late January, their trajectory has sharply reversed in recent weeks. Three weeks ago, this type of portfolio faced a substantial drawdown of 22.99% from its peak. This marked the largest decline for such strategies since late 2024, a period that saw drawdowns of nearly 25%.

The observed drawdown in long-trend strategies during that time was indicative of broader deleveraging activity within crypto markets, as traders reduced risk exposure and unwound positions, including exiting carry trades. The reversal in the performance of these trend portfolios coincided with the emergence of more bullish macroeconomic catalysts since mid-April. There are indications that traders are now re-leveraging their positions and re-entering the Bitcoin carry trades closed over the previous three months.

BTC ETF Flows

Net inflows this week totaled $1.27B, falling slightly from two weeks ago, when they crested $2.653B. Last week’s inflows were the largest since November and, in retrospect, served as a strong signal of a bottom.

Volatility

Bitcoin’s implied volatility (DVOL) currently sits at 45.47%, positioning it in the bottom 2.7% relative to its average level over the past year. During this period, DVOL has predominantly ranged between 50% and 70%. DVOL exhibits strong mean reversion tendencies when approaching this limit of the established 10-month range, suggesting it is likely to find a bottom near the current level. Unlike the stock market, Bitcoin can experience volatility expansion during both strong uptrends and downtrends, meaning that if prices continue to rise, volatility may increase as well. However, this attribute has not been observed during the most recent price increases.

Basis Spread

The basis spread, the price of a futures contract over its spot price, is currently positive across all maturities. This week, the average equal-weighted basis spread decreased by 1.23%, falling from 7.78% APR to 6.55% APR.

The futures curve has largely returned to a normal contango structure, with the front week contract (May 16th) showing the lowest APR at 5.89%. Maturities generally exhibit rising APRs thereafter, with the exception of the back month June contract, which is yielding lower than the front month May contract. The spread between the lowest and highest yielding maturities is now 0.97% APR, a significant decrease from 3.85% APR last week, making this the flattest curve observed in over a month.

APRs fell across the entire curve with the most pronounced declines occurring at the front end. Specifically, the front month (May 30th) contract's APR dropped from 7.67% to 6.6%, while the December 2025 contract saw its APR fall from 7.11% to 6.83%, and the March 2026 contract decreased from 7.09% to 6.86%. Market makers frequently utilize front-end contracts for hedging spot exposure, whereas speculative traders tend to focus on the longer end of the curve. The decrease in the front-end APRs suggests a recent decline in demand for spot and short-duration options following the price action this week.

The ideal futures curve is typically characterized as a downward-sloping contango, where demand for contracts with closer maturities outstrips the supply that market makers can readily provide in the short run. The futures curve observed in January (Figure 9) serves as an example of a market experiencing high spot demand.

Market makers strategically use front-month futures contracts to hedge short or current duration assets, such as front week options, perpetual swaps, and spot Bitcoin positions. Employing front maturities allows market makers to manage larger books while maintaining delta neutrality. The greater the APRs of front maturities are relative to those of more distant maturities, the more bullish the market sentiment is considered to be in the near term.

Macro

Since January 20th, a wide-ranging shift in US geopolitical policy has been observed, directed towards strengthening domestic production and reorienting US military assets. Tariffs represent a prominent aspect of this policy change.

The implementation of these policy changes has shown variability. Markets reacted significantly in early April, but have since risen following a reduction in tariff-related tensions.

This week, a trade agreement was finalized with the United Kingdom. The agreement maintains the existing 10% US tariff on UK goods but includes significant exceptions for steel and aluminum. The UK, in turn, lowered its tariff rate on several American goods, such as beef, and increased import quotas. Given that the UK-US goods trade was largely balanced prior to recent tariff implementations, both nations had incentives to reach this agreement. Trade negotiations with other countries and blocs may present different dynamics.

Current US tariffs on Chinese goods stand at 145%, while China's tariffs on US goods are at 125%. In addition to tariffs, the Chinese government has implemented non-tariff measures, including restrictions on Hollywood movies and rare earth element exports. Meanwhile, exceptions for smartphones and semiconductors have been made, and a reduction of tariffs to 50% - 65% on all Chinese goods is reportedly under consideration.

As both countries engage in bilateral negotiations, they are also conducting trade talks with other nations. Chinese President Xi visited Vietnam in mid-April as part of a Southeast Asia tour that included opening trade discussions. Policy statements have indicated that countries enacting high trade barriers against China could see a significant reduction in US tariffs.

On May 7th, the Federal Reserve conducted its third FOMC meeting of the year. The decision was made to hold rates steady, with no change announced regarding the $5B level of quantitative tightening (QT) set at the March meeting.

During the treasury basis trade disruption in mid-April, speculation arose regarding potential emergency quantitative easing by the Fed; however, markets calmed following the delay in tariff implementation.

The recent FOMC meeting was largely consistent with expectations. The Federal Reserve Chairman indicated that current rate levels provide flexibility to implement cuts if the economy weakens. Uncertainty was expressed regarding the necessity of further rate cuts this year. Following the meeting, commentary from the administration criticized the decision, citing declining oil prices as a potentially deflationary factor. The recent decision by OPEC+ to remove oil production caps is expected to put downward pressure on oil prices. As oil distillates are a key input across economic sectors, a decline in oil prices is likely to reduce production costs and impact final goods prices.

In contrast to the Federal Reserve, the European Central Bank (ECB), the Bank of England (BOE), the People’s Bank of China (PBOC), and the Swiss National Bank (SNB) have all implemented rate cuts in the past month. As noted by the ECB, tariffs can have differing effects on individual countries. Given that the United States is a major importer and many other countries are net exporters to the US, US tariffs tend to be inflationary for US domestic prices while potentially having a deflationary effect on prices in other nations.

The European Central Bank (ECB), the Bank of England (BOE), the People’s Bank of China (PBOC), the Swiss National Bank (SNB) all cut rates in the last month but not the Federal Reserve. As cited by the ECB at their last meeting, tariffs have differing effects by country. Since America is a major buyer of foreign goods and most other countries are net exporters to America, the effect of US tariffs is inflationary on US goods prices while deflationary on foreign goods prices.

Despite recent remarks concerning future rate cuts, the December SOFR futures market continues to indicate expectations for a 75-basis point cut by year-end, an increase from the 50 bp anticipated before the tariff announcement.

The Dollar Index ($DXY), which measures the US dollar against a basket of other currencies, rose this week but remains approximately 3.2% below its level before the tariff announcement. The $DXY appears to be establishing support around the 100 level. Equity prices have recovered in recent weeks, while the value of the dollar has not yet fully recovered.

Both equity market implied volatility (VIX) and US treasury bond implied volatility (MOVE) increased following the tariff announcement and remain elevated a month after. The VIX and MOVE indices are currently at 22.42 and 98.66, respectively, down from 23.8 and 107.33 last Thursday. Traditional finance volatility is showing a slow decrease from recent highs, with the VIX reaching levels not seen since August 2024 and treasury bond volatility at its highest since late 2023. The bond market has shown noticeable calming this week.

Sincerely,
The Hermetica Team