Is the upcoming interest rate cut a mistake in easing? How will the scenario unfold?

Written by: Luke, Mars Finance

The Choice at the Crossroads

The market is holding its breath, almost seeing the Federal Reserve's interest rate cut as the starting gun for a new round of asset frenzy. However, a warning from JPMorgan is like a boulder thrown into a calm lake: what if this is "the wrong type of easing"?

The answer to this question is crucial. It determines whether what is about to unfold is a "soft landing" comedy that brings joy to all, or a "stagflation" tragedy marked by stagnant economic growth and high inflation. For cryptocurrencies intertwined with macroeconomic fate, this is not only a choice of direction but also a test of survival.

This article will delve into these two possibilities, attempting to outline how the future might unfold if the scenario of "error-type easing" comes true. We will see that this scenario will not only reshape the landscape of traditional assets but may also trigger a profound "great differentiation" within the crypto world, and conduct an unprecedented stress test on the infrastructure of DeFi.

Script 1: The Dual Nature of Interest Rate Cuts

How the script unfolds depends first on how we interpret history. Interest rate cuts are not a panacea; their effects completely depend on the economic environment in which they are released.

Positive Scenario: Soft Landing and Comprehensive Prosperity In this scenario, economic growth is steady, inflation is under control, and the Federal Reserve cuts interest rates to give the economy an additional boost. Historical data is a loyal proponent of this scenario. Research from Northern Trust shows that since 1980, in the 12 months following the initiation of such "correct interest rate cuts," the U.S. stock market has averaged a return of 14.1%. The logic is simple: lower capital costs lead to increased consumer and investment enthusiasm. For high-risk assets like cryptocurrencies, this means riding the wave and enjoying a liquidity feast.

Negative Scenario: Stagflation and the Disaster of Assets But what if the script turns in another direction? Economic growth is weak, while inflation stubbornly persists like a tenacious weed, forcing the Federal Reserve to cut interest rates to avoid a deeper recession. This is what is known as "misguided interest rate cuts," synonymous with "stagflation." The United States in the 1970s was a prelude to this script, where the oil crisis and loose monetary policy jointly directed a disaster of economic stagnation accompanied by rampant inflation. According to the World Gold Council, during that era, the annualized real return on U.S. stocks was a dismal -11.6%. In this scenario where almost all traditional assets suffered, only gold stood out, recording an annualized return as high as 32.2%.

Goldman Sachs recently raised the probability of a U.S. economic recession and predicted that the Federal Reserve may cut interest rates in 2025 due to an economic slowdown. This warns us that the unfolding of negative scenarios is not alarmism.

Script 2: The Fate of the Dollar and the Rise of Bitcoin

In the grand play, the US dollar is undoubtedly the protagonist, and its fate will directly influence the direction of the script, especially for the crypto world.

A repeatedly verified rule is that the Federal Reserve's easing usually accompanies a weakening of the dollar. This is the most direct benefit for Bitcoin. When the dollar depreciates, the price of Bitcoin, priced in dollars, naturally rises.

However, the script of "error-type easing" means far more than that. It will become the ultimate test of the theories of two macro prophets in the crypto world—Michael Saylor and Arthur Hayes. Saylor views Bitcoin as a "digital property" to counter the continuous devaluation of fiat currency, a Noah's Ark to escape the traditional financial system that is destined to collapse. Hayes believes that America's massive debt leaves it with no choice but to "print money" to cover fiscal deficits. A "wrong rate cut" is a key step towards this prophecy becoming a reality, at which point capital will flood into hard assets like Bitcoin seeking refuge.

However, this script also harbors a huge risk. As the weakening dollar fuels the narrative of Bitcoin as the king, the cornerstone of the crypto world—stablecoins—are facing erosion. Stablecoins with a market cap of over $160 billion are almost entirely backed by dollar assets. This is a massive paradox: the macro forces driving up Bitcoin may be eroding 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.

Script Three: The Collision of Yields and the Evolution of DeFi

Interest rates are the guiding force of capital flow. When the script of "misguided easing" unfolds, there will be an unprecedented collision between the yields of traditional finance and decentralized finance (DeFi).

The yield on U.S. Treasury bonds is considered the global "risk-free" benchmark. When it can offer stable returns of 4%-5%, similar yields in higher-risk DeFi protocols pale in comparison. This pressure of opportunity cost directly limits the influx of fresh capital into DeFi.

In order to break the deadlock, the market has spawned "tokenized U.S. Treasury bonds," attempting to bring the stable returns of traditional finance onto the blockchain. However, this could be a "Trojan horse." These safe Treasury bond assets are increasingly being used as collateral for high-risk derivative trading. Once a "wrong rate cut" occurs, leading to a decline in Treasury yields, the value and attractiveness of tokenized Treasury bonds will also decrease, potentially triggering capital outflows and a chain liquidation, precisely transmitting the macro risks of traditional finance to the heart 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 challenges, DeFi protocols will be forced to evolve rapidly, transitioning from a closed speculative market to a system that can integrate more real-world assets (RWA) and provide sustainable real returns.

Script Four: Signals and Noise - The Great Differentiation in the Crypto Market

When the macro "noise" drowns everything out, we need to pay more attention to the "signals" from blockchain. Data from institutions like a16z shows that regardless of market fluctuations, the core data of developers and users continues to grow steadily. Construction has never stopped. Veteran investors like Pantera Capital 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 that divides the cryptocurrency market in two, forcing investors to make a choice: are you investing in macro hedging tools or tech growth stocks?

Under this script, Bitcoin's "digital gold" property will be infinitely amplified, becoming the preferred choice for capital to hedge against inflation and the devaluation of fiat currencies. 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. As a result, capital may massively withdraw from altcoins and flow into Bitcoin, causing a huge differentiation within the market. Only those protocols with strong fundamentals and real income will survive in this wave of "flight to quality."

Summary

The cryptocurrency market is being pulled by two huge forces: on one side is the macro gravitational pull of "stagflation-style easing," and on the other side is the endogenous power driven by technology and applications.

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

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