The Crossroads of the Crypto Market: Analyzing Possible Scenarios for the Future

The market is eagerly anticipating the Federal Reserve's decision on interest rate cuts, viewing it as the beginning of a new round of asset prosperity. However, a recent warning from a large financial institution has sparked deep reflection: what if this is a "wrong type of easing"?

The answer to this question is crucial. It will determine whether we will usher in a "soft landing" that benefits everyone or fall into the dilemma of "stagflation" characterized by stagnant economic growth and high inflation. For cryptocurrencies closely related to the macroeconomy, this not only concerns the direction of development but also serves as a test of survival.

Let us delve into these two possibilities and attempt to outline how the future will unfold if "error-type easing" becomes a reality. We will see that this situation will not only reshape the landscape of traditional assets but could 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

The effect of interest rate cuts entirely depends on the economic environment at the time; it is not a panacea.

Positive Scenario: Soft Landing and Comprehensive Prosperity

In this case, economic growth is robust, inflation is under control, and the central bank's interest rate cuts aim to further stimulate the economy. Historical data supports this view. According to research from a financial institution, since 1980, the average return rate of the US stock market has reached 14.1% in the 12 months following the initiation of such "correct interest rate cut" cycles. The logic is simple: as the cost of capital decreases, consumption and investment enthusiasm surges. For high-risk assets such as cryptocurrencies, this means being able to hitch a ride on the tailwind and enjoy a liquidity feast.

Negative Scenario: Stagflation and Asset Disaster

But what if the situation is reversed? Economic growth is weak, but inflation remains high, forcing the central bank to cut interest rates to avoid a deeper recession. This is known as "misguided interest rate cuts," synonymous with "stagflation." The United States experienced such a situation in the 1970s, where the oil crisis and loose monetary policy led to a disaster of stagnant economic growth and rampant inflation. Data shows that during that era, the annualized real return rate of U.S. stocks was -11.6%. In this scenario where almost all traditional assets suffered, only gold performed exceptionally well, recording an annualized return rate of 32.2%.

Recently, an investment bank raised the probability of a recession in the US and predicted that the central bank might cut interest rates in 2025 due to economic slowdown. This warns us that the emergence of negative scenarios is not impossible.

The Fate of the Dollar and the Rise of Bitcoin

On the grand stage of the macro economy, the US dollar is undoubtedly the main character, and its trajectory will directly impact future developments, especially in the crypto market.

A repeatedly verified rule is that central bank easing policies are usually accompanied by 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 scenario of "erroneous easing" goes far beyond that. It will serve as the ultimate test of the theories of two renowned analysts in the crypto world. One believes that Bitcoin is a "digital property" against the continuous devaluation of fiat currency and a refuge from the traditional financial system. The other believes that the massive debt of the United States leaves it no choice but to pay for the fiscal deficit through "money printing." A "wrong interest rate cut" is the key step for this prediction to come true, at which point capital may flow into hard assets like Bitcoin in large amounts seeking protection.

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

The Collision of Yield Rates and the Evolution of DeFi

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

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

To meet this challenge, the market has seen the emergence of "tokenized U.S. Treasury bonds," attempting to bring the stable returns of traditional finance into blockchain. However, this could be a double-edged sword. These secure Treasury bond assets are increasingly being used as collateral for high-risk derivative trading. Once a "wrong interest rate cut" occurs, causing Treasury yields to fall, the value and attractiveness of tokenized Treasury bonds will decline accordingly, potentially triggering capital outflows and chain liquidations, transmitting the macro risks of traditional finance into the DeFi space.

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 and provide sustainable real returns.

Signals and Noise: The Great Diversification of the Crypto Market

When the macro "noise" drowns everything out, we need to pay more attention to the "signals" from the blockchain. Some institutional data shows that regardless of market fluctuations, the core data of developers and users continues to grow steadily. Construction has never stopped. Some seasoned investors also believe that with the improvement of the regulatory environment, the market is entering the "second phase" of the bull market.

However, the scenario of "error-prone easing" could 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?

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

Conclusion

The crypto market is being pulled by two powerful 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 development will not be singular. A "wrong interest rate cut" may simultaneously drive up Bitcoin and eliminate most small encryption currencies. 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 relationship between macro and micro will be key to facing future challenges. This is no longer just a bet on technology; it is a grand game about which development path you choose to believe in at critical junctures in the history of the global economy.