Grayscale: The Great Beauty Act, crypto vault companies are generating demand for Bitcoin

• Bitcoin price hit an all-time high in May 2025 as the dual drive of macro demand and regulatory tailwinds continued to drive the crypto bull market.
• The demand for Bitcoin from investors partly stems from the macroeconomic imbalances in the United States, including the ongoing fiscal deficit. Although the deficit is not a new phenomenon, the comprehensive tax and spending bill currently moving through Congress is likely to keep U.S. finances on an unsustainable path.
• The financial risks in the United States seem to be driving demand for Bitcoin, as evidenced by the rise of "Bitcoin treasury" companies (i.e., publicly listed companies that hold Bitcoin on their balance sheets). The valuation premium these companies receive indicates a broad interest from traditional stock market investors in allocating to encryption assets. However, we believe that the "encryption treasury" strategy for tokens other than Bitcoin has limitations, as investors will ultimately be able to access more allocation channels through spot crypto exchange-traded products (ETPs).
• This month also saw the following progress: breakthroughs in stablecoin and market structure legislation; the decentralized exchange Hyperliquid performed brilliantly; the blockchain-based identity verification project Worldcoin made it to the cover of Time magazine.

Equities rebounded in May as the U.S.-China tariff conflict reached a temporary détente. But the rally comes after three consecutive months of declines, with the S&P 500 still about 4% below its peak. Bond markets, particularly high-quality sectors, have seen negative returns compared to relatively healthy equities, which appears to be due to high government deficits and the corresponding issuance of long-term Treasuries. According to the capitalization-weighted FTSE Grayscale Crypto Sector Index, the risk-adjusted return for Bitcoin and the crypto asset class as a whole is comparable to that of global equities (Figure 1). Bitcoin rose 11% for the month to an all-time high of $112,000, while ETH, the native token of the Ethereum blockchain, rose 44%, partially recovering its previous weak performance against Bitcoin.

Figure 1: Risk-adjusted performance of the encryption market is on par with the stock market.

Great Beauty Act

When investors have concerns about the credibility of the fiat system, demand for Bitcoin tends to rise. During May, this concern came into focus again. On May 22, the U.S. House of Representatives passed a comprehensive tax and spending bill now officially named OBBBA (One Big Beautiful Bill Act). **Budget experts estimate that the bill would add about $3 trillion to the federal deficit over the next 10 years if implemented under current terms; If some of the expiring terms are extended, the deficit could be as high as $5 trillion. **If the bill goes into force, its balance of payments would put U.S. Treasuries on an unsustainable path (Figure 2). Moody's downgraded the U.S. sovereign credit rating from AAA to AA on May 16 in part as a result of the direction of U.S. fiscal policy. While the U.S. government will not default in the near term, an unsustainable debt path will increase the long-term risk of macroeconomic mismanagement, thereby increasing investor interest in non-sovereign stores of value such as gold and Bitcoin.

Figure 2: OBBBA makes the U.S. fiscal path unsustainable

Encryption Vault Companies Surge

Spot ETPs listed in the U.S. are arguably the most important source of new demand for Bitcoin since its launch. During May, these products continued to have high net inflows, totalling $5.2 billion. In the coming months, bitcoin purchases by "bitcoin vault" companies (i.e., publicly traded companies buying bitcoin for their balance sheets) are likely to be equal to or even exceed those of spot bitcoin ETPs. Enterprise bitcoin investment pioneer Strategy (formerly MicroStrategy) increased its holdings by about 27,000 bitcoins (about $2.8 billion) in May. Strategy's market capitalization far exceeds the value of Bitcoin on its balance sheet, suggesting that there is an excess demand for exposure to Bitcoin through equity instruments (Figure 3).

Figure 3: The market value of the Strategy shows a premium relative to its Bitcoin holdings.

As the stock market pays a premium for Bitcoin in this structure, more companies are adopting this strategy, and some have expanded into other digital assets beyond Bitcoin. For example, a consortium of Tether, Bitfinex, and SoftBank created Twenty One Capital, which will initially hold 42,000 BTC (about $4.4 billion), mainly provided by Tether. Similarly, Bitcoin Magazine CEO David Bailey transformed KindlyMD, an existing publicly traded company, into Nakamoto Holdings, a Bitcoin vault company. The company plans to issue about $700 million in shares and convertible bonds in the U.S. market to buy bitcoin, and will replicate the strategy in other countries around the world. Finally, Trump Media & Technology Group, the holding company of Trump's social app Truth Social, announced that it will raise $2.5 billion to allocate bitcoin to its balance sheet.

Apart from Bitcoin, SharpLink Gaming announced that it will transform into an Ethereum treasury company with the support of investors in the encryption field such as Consensys (Figure 4). Other entrepreneurs have further expanded this model, creating treasury companies for Solana (Upexi), XRP (VivoPower), and even Trump-themed meme coins (Freight Technologies). The surge of treasury companies in the encryption space indicates strong investor interest in gaining exposure to encrypted assets listed on exchanges. However, the popularity of spot crypto ETPs may eventually limit the demand for treasury companies, as ETPs can track the underlying token prices more efficiently.

Figure 4: Surge of encryption vault companies

Digital Asset Legislation

In terms of legislation, the White House and Congress continue to advance the legislative work on the regulation of digital assets in the United States. On May 5, the House Financial Services Committee and the Agriculture Committee jointly released a draft Digital Asset Market Structure Act, a comprehensive financial services legislation comparable in scope to the Dodd-Frank Act or the Sarbanes-Oxley Act. The House of Representatives is scheduled to hold a hearing on the updated draft on June 4. In addition, the GENIUS Act (the National Innovation Act for Guiding and Building U.S. Stablecoins) received bipartisan support on May 19 and passed a Senate termination vote and is about to enter the process of amendment. Although there are still many steps to go before the two pieces of legislation come into force, the progress and bipartisan support for the final passage have sent positive signals.

Since the U.S. election last November, the prospect of a clearer regulatory framework appears to have catalyzed institutional investors' exposure to the sector. This trend continued in May with a number of major transactions and/or policy adjustments. The most important of these is Coinbase's $2.9 billion acquisition of crypto options specialist platform Deribit, setting a record for the largest M&A deal in the history of the industry. Coinbase was also included in the S&P 500 index this month and is currently ranked 187th. Rival Kraken (also active in M&A) announced that it will launch a tokenized stock service in non-US markets, while Robinhood said it would acquire Canadian crypto platform WonderFi. Other notable institutional developments include Brown University's disclosure of its Bitcoin ETP position, New Hampshire's passage of legislation allowing public funds to invest in crypto assets, and Morgan Stanley's plans to launch a crypto trading service in its E-Trade offering.

ETH and Performance of Various Tokens

Ethereum (ETH) significantly outperformed Bitcoin in May, but partly due to the statistical timing: since the beginning of 2023, ETH price movements have largely coincided with the crypto sector of the "smart contract platform" (Figure 5). We expect smart contract platforms to benefit from U.S. regulatory reforms, which will drive broader adoption of stablecoins, tokenized assets, and decentralized finance – all of which rely on smart contract platform infrastructure. While this is a highly competitive segment of the crypto market, Ethereum has advantages such as a large scale of on-chain funds, a decentralized culture, and a focus on network security and neutrality. However, the ETH token price needs to be supported by the growth of activity on the Ethereum mainnet (Layer 1) rather than on the many L2 networks (Layer 2). While the Pectra upgrade implemented in May will bring beneficial improvements, it will not immediately increase mainnet activity.

Figure 5: The performance of Ethereum is basically synchronized with the encryption sector it belongs to.

Despite ETH's strong performance during the month, the most prominent of the large assets with a market cap of more than $5 billion was Hyperliquid's HYPE token. Hyperliquid is both a decentralized exchange (DEX) professional perpetual contracts and a general smart contract platform. The chain's hypercore products currently account for more than 80% of the on-chain perpetual contract trading volume. During May, Hypercore's perpetual contract trading volume exceeded $17 billion, and its daily revenue at the end of the month even surpassed that of Ethereum, Tron, and Solana, the three major (in terms of fee income) smart contract platforms (Figure 6). Last year, the protocol set a record for the largest airdrop in crypto history — more than $8 billion at current prices — prompting an industry-wide rethink of tokenomics and funding models without VC backing. Hyperliquid has always maintained high organic usage and strong liquidity, and will increasingly compete with centralized derivatives exchanges such as Binance and Bybit in the future.

Figure 6: Hyperliquid's fee income surpasses that of leading smart contract platforms

AI Encryption Sector Performance

With the rapid development of blockchain AI technology, Grayscale Research has recently added the "Artificial Intelligence Encryption Sector", becoming the sixth independent sector in our cryptocurrency industry classification framework. Currently, this sector includes 20 types of tokens, with a total market capitalization of approximately 20 billion USD (Figure 7).

Figure 7: The current market value of the artificial intelligence encryption sector is approximately 20 billion USD.

Recent notable projects in the sector include Worldcoin, an identity network founded by Sam Altman to build a "proof of personality" system to address the growing challenges of human/bot recognition in the AI era. This month, Worldcoin announced a major milestone in the closing of a $135 million funding round in the form of a public market acquisition of WLD tokens by a16z and Bain Capital Crypto. The project has attracted a lot of attention with its inclusion on the cover story of Time magazine, the promotion of the iris scanning device "Orb" in the U.S. market, and the crypto wallet World App. Other important developments in the blockchain AI space include the increased interest of the Bittensor sub-network and the disclosure by Tether, a leading stablecoin issuer, of its plans to launch an AI agent network based on a crypto-native architecture.

In the coming months, the crypto market is likely to continue the current driving logic: macro demand for Bitcoin driven by stagflation risks and tariff uncertainties, ongoing improvements in the regulatory environment in the U.S. and abroad, and technological innovations in fields such as blockchain AI. This asset class has performed well over the past two years, and the supporting factors for fundamental improvement still exist.