The Crossroads of the Crypto Market: Opportunities and Challenges Under Multiple Scenarios

The market is holding its breath, hoping that the Federal Reserve's interest rate cuts can trigger a new round of asset prosperity. However, some financial institutions warn that if this is the "wrong type of easing," the situation could be very different. The answer to this question is crucial, as it will determine whether the future sees a comedy of an economic "soft landing" or a tragedy of "stagflation" with stagnation and high inflation coexisting. For cryptocurrencies closely related to the macro economy, this is not only about choosing a direction but also a test of survival.

Let us delve into these two possibilities and outline the potential impacts that a "mistake-type easing" scenario could bring. This situation would not only reshape the landscape of traditional assets but might also trigger a profound "great divergence" within the crypto world, subjecting the infrastructure of decentralized finance (DeFi) to an unprecedented stress test.

The Double-Edged Sword Effect of Interest Rate Cuts

Lowering interest rates is not a universal remedy, and its effectiveness entirely depends on the current economic environment.

Positive Script: Soft Landing and Comprehensive Prosperity

In this case, economic growth is robust, inflation is under control, and the Federal Reserve's interest rate cuts aim to further stimulate the economy. Historical data supports this view. Research shows that since 1980, U.S. stocks have averaged a 14.1% return in the 12 months following the start of such "correct interest rate cut" cycles. The logic is simple: lower cost of capital leads 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 asset disaster

However, if economic growth is sluggish while inflation remains high, the Federal Reserve may be forced to cut interest rates to avoid a deeper recession, which is known as a "policy error" and is synonymous with "stagflation." The United States experienced such a situation in the 1970s, where the oil crisis and loose monetary policy together led to the dilemma of stagnant economy and rampant inflation. Data shows that during that period, the annualized real return on U.S. stocks was -11.6%. In the face of losses in almost all traditional assets, only gold performed exceptionally well, recording an annualized return of 32.2%.

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

The Fate of the Dollar and the Rise of Bitcoin

In the macroeconomic landscape, the US dollar plays a central role, and its trends will directly affect future developments, especially in the crypto market.

A commonly observed phenomenon is that the Federal Reserve's easing policies are usually accompanied by a weakening of the dollar. This is a direct benefit for Bitcoin. When the dollar depreciates, the price of Bitcoin, priced in dollars, naturally rises.

However, the impact of "erroneous easing" goes far beyond this. It will become a key moment to test the theories of two macro prophets in the encryption world. One believes that Bitcoin is a "digital property" against the continuous depreciation of fiat currency, a safe haven from the collapse of the traditional financial system. The other believes that the enormous debt of the United States leaves it no choice but to "print money" to cover the fiscal deficit. An "erroneous rate cut" may be the crucial step for these prophecies to come true, at which point capital may flow massively into hard assets like Bitcoin seeking refuge.

However, this situation also hides significant risks. When the dollar weakens and drives up Bitcoin, the cornerstone of the crypto world—stablecoins—may face challenges. Stablecoins with a market value of over $160 billion are almost entirely backed by dollar assets. This is a paradox: the macro forces that drive up Bitcoin may simultaneously erode the actual value and credibility basis of the financial instruments used to trade Bitcoin. If global investors lose confidence in dollar assets, stablecoins will face a severe trust crisis.

Yield Rate Collision and the Evolution of DeFi

Interest rates are the guiding force of capital flows. When "erroneous easing" occurs, there will be an unprecedented collision between the yields of traditional finance and DeFi.

U.S. Treasury yields are the benchmark for "risk-free" returns globally. When they can provide a stable return of 4%-5%, the higher-risk yields in DeFi protocols become less appealing. This pressure of opportunity cost directly limits the funds flowing into DeFi.

To address this challenge, the market has seen the emergence of "tokenized U.S. Treasuries," attempting to bring the stable returns of traditional finance into the blockchain. However, this may conceal risks. These secure Treasury assets are increasingly being used as collateral for high-risk derivative trading. Once a "wrong interest rate cut" occurs, Treasury yields will decline, and the value and attractiveness of tokenized Treasuries will follow suit, potentially triggering capital outflows and chain liquidations, transmitting the macro risks of traditional finance to the DeFi space.

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

The Differentiation of the Crypto Market

When macro "noise" fills the market, we need to pay more attention to the "signals" from the blockchain. Some institutional data shows that regardless of market fluctuations, core data from developers and users continues to grow steadily. Some seasoned investors believe that with an improving regulatory environment, the market is entering the "second phase" of a bull market.

However, the emergence of "error-type easing" may become a double-edged sword, dividing the crypto market into two and forcing investors to make a choice: are you investing in macro hedge tools or technology growth stocks?

In this case, Bitcoin's "digital gold" property may be magnified infinitely, becoming the preferred choice for capital to hedge against inflation and the depreciation of fiat currency. The situation for many other cryptocurrencies may 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 massively withdraw from these coins and flood into Bitcoin, causing a huge divergence within the market. Only those protocols with strong fundamentals and real revenues can survive in this wave of "flight to quality."

Conclusion

The crypto market is facing two tremendous forces pulling it in different directions: on one side is the macro impact of "stagflationary easing," and on the other side is the endogenous momentum driven by technology and application.

The future development will not be a single path. A "wrong interest rate cut" may simultaneously drive Bitcoin up while adversely affecting other encryption currencies. This complex environment is pushing the crypto market towards maturity at an unprecedented pace, and the true value of various protocols will be tested in a harsh economic environment.

For industry participants, understanding the logic of different situations and grasping the complex relationships between macro and micro will be key to addressing future challenges. This is not just an investment in technology; it is a grand game of choosing which development path to believe in at critical junctures of the global economy.