Research Note: Geopolitical Uncertainty, Crypto Speculation, and the Fed's Path

Key Takeaways

• A 50% market-implied probability of President Trump leaving office before 2026 is the dominant, distorting factor across all asset classes, representing a potential constitutional crisis.
• Crypto price expectations are heavily subdued for 2025, with extreme upside (<2% for >$130K BTC) deemed far less likely than a significant drawdown (20% for ~$80K).
• Fed policy is priced for near-certainty (98% for three cuts), creating fragility if political shocks force a policy reconsideration, a risk currently underestimated (6% for two cuts).
• The interconnectedness mandates cross-asset analysis: the resolution of the political binary will directionally cascade into monetary policy and crypto valuations.

Executive Summary

This note synthesizes high-volume prediction market data from Kalshi to provide a forward-looking assessment of interconnected geopolitical, monetary policy, and digital asset risks for 2025. The standout signal is a market-implied 50% probability of a leadership change in the U.S. presidency before year-end, an event of unprecedented electoral and constitutional magnitude. This political risk premium is casting a long shadow over all other markets. Concurrently, crypto markets exhibit a stark dichotomy: modest probabilities for extreme price rallies (1-2% for Bitcoin >$130K) contrast with a higher 20% chance of a significant correction to ~$80K. Monetary policy expectations, meanwhile, have reached a near-consensus state, with a 98% probability priced for three consecutive Fed rate cuts. The interplay of these factors—where political volatility could disrupt monetary policy certainty and crypto market sentiment—creates a complex, high-stakes trading environment for the coming year.

Core Thesis: Political Shockwaves as the Dominant Market Driver

The 'Donald Trump out this year?' market, with its substantial $9.8M volume and exactly 50% implied probability, is the gravitational center of the current prediction market landscape. This binary event, resolving 'Yes' if President Trump leaves office before January 1, 2026, is not a typical political bet; it is a wager on a potential constitutional crisis, a premature electoral contest, or a profound health event. The market’s equilibrium at coin-flip odds indicates a deeply divided and uncertain collective forecast, with immense sums willing to back both outcomes.

• Historical Context & Magnitude: There is no modern precedent for a market pricing such a high likelihood of an incumbent U.S. president not completing a term for non-electoral reasons. Even during periods of intense political turmoil (e.g., the 1970s, the Clinton impeachment), prediction markets did not exhibit sustained probabilities at this level for a sitting president's premature departure. The market is effectively signaling that the perceived stability of the U.S. executive branch is at a multi-decade low.
• Actionable Insight: Traders should treat this 50% probability not as a stable baseline but as a highly sensitive leading indicator. Any shift of 5-10 percentage points in either direction, driven by news flow, will have asymmetric effects across all correlated asset classes. A move toward a higher probability would trigger a classic 'risk-off' flight, likely strengthening the dollar as a safe haven while pressuring risk assets. A move toward a lower probability would signal a return to political normalcy, potentially fueling a broad relief rally. Monitoring the order book depth and probability momentum in this specific market is paramount for macro positioning.

Crypto Markets: Speculative Extremes Meet a Political Discount

Cryptocurrency markets on Kalshi show significant capital allocation ($30M+ across five contracts) but express profound caution regarding near-term price extremes. The data reveals a market that is optimistic on direction but skeptical of parabolic moves within 2025, heavily tempered by the overarching geopolitical risk.

• The Asymmetric Price Grid: The suite of Bitcoin price markets paints a clear picture. The highest-volume target, 'Bitcoin above $100,000 by Dec 31, 2025,' carries only an 11% probability ($5.8M volume). The probabilities decay rapidly for higher thresholds: 2% for $140,000 and 1% for both $130,000 and $150,000. This structure indicates that while a bullish trend is acknowledged, expectations for a 2025 blow-off top are severely muted. Crucially, the 'How low will Bitcoin get this year?' market assigns a 20% probability to a decline to the $80,000.01 level. This is a higher probability than any of the extreme upside targets above $130K, highlighting a tangible and priced fear of a sharp correction.
• Fed Policy as a Secondary Driver: The low probabilities for extreme highs suggest the market believes that even a dovish Fed (priced at 98% for three cuts) may be insufficient to propel BTC to all-time highs in an environment of political chaos. Crypto’s narrative as an uncorrelated, inflation-hedge asset is being stress-tested by the prospect of U.S.-centric institutional instability.
• Actionable Insight for Crypto Traders: The current market structure presents a potential opportunity in volatility derivatives or range-bound strategies. The low implied probabilities for extreme outcomes ($80K or $140K+) suggest options markets may be mispricing tail risk. A long strangle strategy, betting on increased volatility in either direction, could be advantageous if the 50% political risk materializes in any form. Conversely, selling out-of-the-money call options above $130,000 collects premium from a low-probability event the market is heavily discounting.

Monetary Policy: A Consensus Built on Shifting Sands

The Federal Reserve outlook, with $9.8M volume across two key contracts, presents the most lopsided probabilities in this dataset. A 98% chance of three rate cuts (75 bps) and a mere 6% chance of only two cuts (50 bps) indicates that traders view a continued, steady easing cycle as almost a foregone conclusion.

• Integration with Political Risk: This near-certainty exists in direct tension with the 'Trump out' market. A sudden political shock would create an immediate dilemma for the Fed: proceed with planned cuts to stabilize financial markets, or pause to assess the inflationary and confidence impacts of a crisis? The 'Powell leaves before 2026?' market, priced at just 1% probability ($6.4M volume), suggests extreme confidence in Jerome Powell's tenure continuity. However, an actual political crisis could pressure this assumption, as Fed leadership can become a political target during turmoil.
• Historical Parallels: The current priced path is more aggressive than the Fed's own 'dot plot' has historically indicated outside of recessionary periods. The market is betting on a proactive Fed focused on normalizing policy from restrictive levels, assuming a benign economic soft landing.
• Actionable Insight: The asymmetry here is critical. While the base case (three cuts) is overwhelmingly priced, offering little edge, the tail risk is a pause or slowdown in cutting due to political or inflationary shocks. The 6% probability for only two cuts seems disproportionately low given the 50% political risk factor. A relative value trade could involve selling the overpriced 'three cuts' contract against buying the underpriced 'two cuts' contract, effectively betting the market is overconfident in the smoothness of the easing cycle.

Interconnected Risk Matrix and Scenario Analysis

These markets cannot be analyzed in isolation. The following matrix outlines how the resolution of the primary political market would cascade through the other key contracts:

Key Catalyst Calendar:

1. Political/Legal Events: Supreme Court rulings, election-related litigation, health disclosures, and mid-term electoral pressure points.
2. Macro Data: Inflation (CPI/PCE) prints that could embolden or restrain the Fed amidst political noise.
3. Crypto-Specific: Spot ETF inflows/outflows, regulatory announcements, and institutional adoption news that must now be filtered through the political risk lens.

Recommendations and Trader Positioning

For Macro Portfolio Managers:

• Primary Hedge: Allocate a small, dedicated portion of the portfolio (1-2%) to direct positions in the 'Trump Out' market as a non-correlated hedge against U.S. political volatility. The 50% probability may offer a favorable risk/reward compared to traditional hedges like VIX calls, which are expensive and less directly targeted.
• Relative Value: Construct a pair trade between Fed cuts contracts, selling the overvalued 'three cuts' (98%) and buying the undervalued 'two cuts' (6%), anticipating that political or inflationary turbulence will slow the easing pace.

For Crypto-Native Traders:

• Focus on Asymmetry: The 20% probability of a drop to $80K is a more compelling risk than the 1-2% chance of a rally above $130K. Position sizing should reflect this skew. Consider buying downside protection in the $75K-$85K range.
• Play the Resolution: Use the political market as a primary signal. A resolution to 'NO' (status quo) is a clear buy signal for BTC and ETH, likely triggering a catch-up rally toward the $100K target. A move toward 'YES' is a signal to reduce exposure and increase cash holdings.

Risk Factors to Monitor:

• Market Illiquidity in Crisis: Prediction markets, while deep under normal conditions, could experience liquidity gaps during a true constitutional crisis, impacting exit strategies.
• Regulatory Intervention: Extraordinary political events could lead to regulatory scrutiny or temporary halts in derivative markets, including prediction markets.
• Narrative Contagion: The 'Trump Out' narrative could become self-reinforcing, affecting consumer and business confidence surveys independent of underlying reality, creating a feedback loop into asset prices.

Conclusion

The prediction markets are broadcasting a clear, urgent signal: the single largest determinant of financial market outcomes in 2025 is the stability of the U.S. presidency. This unprecedented political risk premium is suppressing expectations for crypto asset hyper-growth and underpinning a fragile consensus on Federal Reserve policy. The 50% probability of a premature presidential departure is a statistical representation of a deeply fractured and anxious political environment. Successful navigation of the coming year requires traders to elevate geopolitical analysis to the top of their decision hierarchy, using these prediction market probabilities not as curiosities, but as core inputs for stress-testing portfolios, constructing hedges, and identifying the profound asymmetries created when the foundational assumptions of the market—stable governance and predictable policy—are themselves in doubt.

Market Analysis

Donald Trump out this year? 📈

Current Probability: 50.0%

The linchpin market. Equilibrium at 50% indicates maximum uncertainty and divides significant capital. A move of +/- 10% will signal major shifts in perceived stability.

Bitcoin > $100,000 by EOY 2025 ➡️

Current Probability: 11.0%

Directly suppressed by political risk. A 'Trump Out: NO' resolution could propel this probability to 25%+. A 'YES' resolution could collapse it to <5%.

Fed Cuts 3x (75 bps) 📉

Current Probability: 98.0%

Overwhelmingly priced consensus. Offers little value alone but is vulnerable to a slowdown scenario. The key risk is political disruption, not inflation.

Bitcoin Low < $80,000 ➡️

Current Probability: 20.0%

The most underappreciated crypto risk. Probability is meaningfully higher than extreme upside bets, suggesting a cautious market positioning for a correction.