Crypto Assets Market Crossroad

The market is holding its breath, anticipating that the Federal Reserve's interest rate cut will signal a new round of asset frenzy. However, a warning comes like a thunderclap: what if this is "the wrong type of easing"?

The answer to this question is crucial. It will determine whether what is about to unfold is a joyous "soft landing" comedy or a tragic "stagflation" characterized by stagnant economic growth and high inflation. For Crypto Assets closely tied to macroeconomic fate, this is not only about choosing a direction, but also a test of survival.

Let’s delve into these two possibilities and outline how the future might unfold if the "error-prone easing" scenario comes true. We will see that this scenario will not only reshape the landscape of traditional assets but is also likely to trigger a profound "great divergence" within the Crypto Assets world, and conduct an unprecedented stress test on the infrastructure of decentralized finance (DeFi).

The Dual Nature of Interest Rate Cuts

The effect of interest rate cuts depends entirely on the economic environment at the time.

Positive Script: Soft Landing and Comprehensive Prosperity

In this case, economic growth is robust, inflation is under control, and the Federal Reserve is cutting interest rates to give the economy another boost. Historical data supports this view. Research shows that since 1980, during the first 12 months after the start of such "correct interest rate cuts" cycles, the average return for US stocks is 14.1%. The logic is simple: lower capital costs lead to increased consumer and investment enthusiasm. For crypto assets, which are high-risk investments, this means riding the wave and enjoying a liquidity feast.

Negative Scenario: Stagflation and Asset Catastrophe

If economic growth is weak while inflation remains high, the Federal Reserve is forced to cut interest rates to avoid a deeper recession, which is known as "wrongful rate cuts" or synonymous with "stagflation." The United States experienced such a situation in the 1970s, where the oil crisis and loose monetary policy led to the dilemma of stagnation and rampant inflation coexisting. According to data, during that era, the annualized real return rate of U.S. stocks was -11.6%. In the context where almost all traditional assets suffered, only gold performed exceptionally well, recording an annualized return rate of 32.2%.

Recently, some institutions have raised the probability of a U.S. economic recession and predicted that the Federal Reserve may cut interest rates in 2025 due to economic slowdown. This warns us that the emergence of a negative scenario is not alarmist.

The Fate of the Dollar and the Rise of Bitcoin

In the macro picture, the US dollar is undoubtedly the protagonist, and its trend will directly affect the direction of the script, especially in the crypto world.

A repeatedly verified rule is that Federal Reserve easing is usually accompanied by a weakening of the US dollar. This is directly beneficial for Bitcoin. When the US dollar depreciates, the price of Bitcoin priced in US dollars naturally rises.

But the script of "erroneous easing" has far-reaching implications. It will become the ultimate test of the theories of two macro prophets in the crypto world. Some view Bitcoin as a "digital property" against the continuous devaluation of fiat currencies, a Noah's Ark fleeing the doomed traditional financial system. Others believe that the massive debt in the U.S. leaves it no choice but to "print money" to cover the fiscal deficit. A "wrong interest rate cut" is precisely the key step for this prophecy to become reality, at which point capital will flood into hard assets like Bitcoin seeking refuge.

However, this script also hides tremendous risks. When the dollar weakens and establishes the narrative of Bitcoin as the king, the cornerstone of the crypto world—stablecoins—are facing erosion. Stablecoins with a market value of over $160 billion have reserves that are almost entirely composed of dollar assets. This is a huge paradox: the macro forces driving Bitcoin up may be undermining the actual value and credibility foundation of the financial instruments used to trade Bitcoin. If global investors lose confidence in dollar assets, stablecoins will face a severe trust crisis.

The Collision of Yield Rates and the Evolution of DeFi

Interest rates are the guiding force of capital flows. When the "erroneous easing" scenario unfolds, the yields of traditional finance and decentralized finance ( DeFi ) will experience an unprecedented collision.

The yield on U.S. Treasury bonds is the global "risk-free" benchmark. When it can provide a stable return of 4%-5%, the similar yields in higher-risk DeFi protocols seem insignificant by comparison. This opportunity cost pressure directly limits the funds flowing into DeFi.

To break the deadlock, the market has given rise to "tokenized US Treasury bonds," attempting to bring the stable returns of traditional finance onto the blockchain. However, this could be a "Trojan horse." These secure Treasury bond assets are increasingly being used as collateral for high-risk derivative trading. Once the "wrong interest rate cut" occurs, and Treasury yields fall, the value and appeal of tokenized Treasury bonds will decline, potentially triggering capital outflows and a chain liquidation, accurately transmitting the macro risks of traditional finance to the core of DeFi.

At the same time, economic stagnation will weaken the demand for speculative borrowing, which is the source of high yields for many DeFi protocols. Faced with internal and external troubles, DeFi protocols will be forced to accelerate their evolution, shifting from a closed speculative market to a system that can integrate more real-world assets (RWA) and provide sustainable real returns.

Signals and Noise: The Great Differentiation in the Crypto Market

When the macro "noise" drowns everything, we need to listen more to the "signals" coming from the blockchain. Some institutional data shows that regardless of market fluctuations, the core data of developers and users continues to grow steadily. The construction has never stopped. Some seasoned investors also believe that as regulatory headwinds turn into tailwinds, the market is entering the "second phase" of a bull market.

However, the script of "error-type easing" may become a sharp knife, splitting the crypto market in two and forcing investors to make a choice: are you investing in macro hedging tools or tech growth stocks?

Under this scenario, Bitcoin's "digital gold" attribute will be amplified infinitely, becoming the preferred choice for capital to hedge against inflation and the devaluation of fiat currency. Meanwhile, the situation for many altcoins will become precarious. Their valuation logic is similar to that of growth tech stocks, but in a stagflation environment, growth stocks often perform the worst. Therefore, capital may withdraw en masse from altcoins and flood into Bitcoin, causing a significant divergence within the market. Only those protocols with strong fundamentals and real income will survive this wave of "flight to quality."

Conclusion

The crypto market is being pulled by two enormous forces: on one side is the macro pull of "stagflationary easing," and on the other side is the endogenous power driven by technology and applications.

The future script will not be single-threaded. A "wrong interest rate cut" may simultaneously establish Bitcoin and bury most altcoins. This complex environment is forcing the crypto industry to mature at an unprecedented pace, and the true value of protocols will be tested in a harsh economic climate.

For everyone involved, understanding the logic of different scripts and grasping the complex tension between macro and micro will be key to navigating future cycles. This is no longer just a bet on technology; it is a grand gamble about which script you choose to believe at a critical juncture in global economic history.