It’s been a wild ride in the markets in recent days. The United States Federal Reserve is forecast to cut interest rates in 2024, but uneven inflation prints and a somewhat contradictory jobs market have created a lack of consensus on the total number of rate cuts for the remainder of the year.
As we contemplate where the market goes from here, speculation remains around the question of what the Federal Reserve has in store. So what are some potential outcomes from interest rate cuts? Let’s explore the impact on a few areas of the crypto industry.
Return of risk-on assets
As rates come down, the resultant weakening of US Treasury yields are likely to strengthen the spotlight on riskier but higher yield opportunities elsewhere — and that means investors will likely have a greater appetite for cryptocurrencies. This uncertainty puts the focus on Bitcoin (BTC), which is typically seen as a risk-on asset. When interest rates drop, investors pile into riskier asset classes.
ARK Invest CEO Cathie Wood joined HashKey CEO Deng Chao for a fireside chat at the 2024 Web3 Festival in Hong Kong. Source: YouTube
That may not always be the case, as ARK Invest CEO Cathie Wood pointed out during our fireside chat at the Hong Kong Web3 Festival earlier this year. She expressed her belief that Bitcoin could actually function as a risk-off asset, citing its success amid "currency devaluations in emerging markets around the world."
DeFi returning
The long summer of decentralized finance (DeFi) in 2021 was a pivotal moment for Web3, the second major bull market following the 2017 ICO boom. During this phase, lots of critical DeFi infrastructure came on-chain, particularly on Ethereum (ETH). All told, its total value locked (TVL) increased by around 2,100% from roughly $700 million to $15 billion.
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But today’s DeFi landscape is increasingly focused on another ecosystem: Bitcoin. Against a backdrop of reduced interest rates, investors may be drawn to higher yields on the network and its growing number of layer-2s — so much so that I believe Bitcoin will power the next DeFi summer.
There’s excitement about the evolving "BTCFi" movement that is different from the buzz around the asset as an inflation hedge. As well as the bullish ETF approvals earlier this year, Bitcoin’s DeFi ecosystem is also booming, triggered by last year’s launch of Ordinals — followed by Runes — and a wave of yield-bearing protocols on EVM-compatible scaling solutions.
And Bitcoin is also gaining utility and interoperability with funds flowing into projects like Babylon and others. This reflects a broader trend across the DeFi landscape: a culture defined less by pure speculation and more by community, utility, and innovation. While speculators and “degens” can still pump their bags, the space as a whole is becoming more relevant to the mass market.
Naturally, the viability of a supercharged DeFi sector will depend on the stability of the protocols themselves. A note of caution is that hacks or exploits could dampen investor confidence and limit the expected impact of interest rate cuts on the wider space. This is likely more true now than in previous cycles, since today’s investors have grown both more sophisticated and more skeptical.
Memecoins rise
Still, falling interest rates tend to spur investor activity, increasing their appetite for assets with higher risk but greater potential returns. Case in point: memecoins, which have recently rocketed even in the absence of rate cuts.
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For instance, Political Finance (PolitiFi) memecoins have surged as the US election draws closer, with tokens playing on the names of political figures and movements ($BODEN, $MAGA) pushing the combined market capitalizations above $400 million as of Aug. 16. Elsewhere, a Bitcoin-based dog memecoin, DOG (DOG), became the largest asset launched on the Runes protocol, peaking at a market cap of nearly $1 billion.
It’s entirely possible that memecoins will go parabolic — especially if interest rates trigger a bull market driven by retail FOMO. The memecoin market is worth more than $30 billion (as of Aug. 16). Of course, the inherent volatility of memecoins and their potential for sudden and often spectacular crashes will inevitably keep some investors on the sidelines, particularly if interest rate cuts are less substantial than expected — or if regulatory scrutiny starts to mount.
TradFi brings deeper liquidity
The entrance of spot crypto ETFs in the United States — not to mention their performance — has also piqued the interest of traditional finance, evidenced by billions flowing into Bitcoin ETFs.
With many institutions already warming to the asset class, the net result should be deeper liquidity and greater regulatory support. It’s easy to imagine Ethereum reaching a new all-time price high thanks to institutional inflows.
Increased institutional participation in crypto goes beyond the pursuit of yield, though. TradFi players could show greater interest in stablecoins as a medium for payments and international trade, further reforming the industry’s image as a speculator’s paradise. On the other hand, the lack of a comprehensive, modern framework for digital assets in the United States — as well as the perceived risks associated with DeFi — may continue to hinder widespread adoption, regardless of interest rates.
Naturally, these are just a few areas to watch. The actual impact of any rate cuts will depend on many factors — including regulations, geopolitical tensions, and investor sentiment.
Deng Chao is the CEO of HashKey Capital and president of HashKey Singapore. He holds a master's degree from The China University of Geosciences and is pursuing an EMBA from the National University of Singapore.
This article is for general information purposes and is not intended to be and should not be taken as legal or investment advice. The views, thoughts, and opinions expressed here are the author’s alone and do not necessarily reflect or represent the views and opinions of Cointelegraph.
