Arthur Hayes, chief investment officer at Maelstrom and co-founder of BitMEX, said at the Token2049 conference in Singapore that risk assets including cryptocurrencies could collapse within days of the Federal Reserve’s first interest rate cut.

Cutting interest rates is a bad idea

In an interview with CoinDesk on the sidelines of the Token2049 conference, Arthur Hayes explained that the upcoming rate cut will exacerbate inflation problems and cause the Japanese yen (JPY) to strengthen, triggering widespread risk aversion.

“Cutting interest rates is a bad idea because inflation is still a problem in the United States and the government is the main driver of price pressures. If borrowing costs are lowered, this will increase inflation. The second reason is that cutting interest rates will narrow the interest rate gap between the United States and Japan. , which could lead to a sharp appreciation of the yen and trigger the unwinding of the yen carry trade.”

Markets had already felt the damaging effects of a stronger yen and the subsequent unwinding of the yen carry trade in early August this year, when the Bank of Japan raised its benchmark lending rate from 0 to 0.25%. Bitcoin fell from about $64,000 to $50,000 in a week at the time.

Arthur Hayes emphasized that the "USD/JPY exchange rate" is the only important indicator in the short term.

Most analysts expect the Bank of Japan to further raise interest rates in the coming months, while the Federal Reserve will go the opposite direction (cut rates). The policy divergence means the yen could strengthen further, forcing investors to unwind risky assets financed by yen-denominated loans.

Arthur Hayes predicts that U.S. interest rates will fall back to near zero from their current range of 5.25% to 5.5%.

"The initial market reaction will be negative, and the central bank's response will be to cut interest rates further to contain the crisis. So I think cutting interest rates is a bad idea, but they will do it anyway and it will be down to zero very quickly."

Does Ethereum have a chance to reverse its decline?

Near-zero interest rates mean investors may once again be looking for other yield opportunities, bringing renewed attention to yield-generating areas of the cryptocurrency market such as Ethereum, Ethena’s USDe and Pendle’s Bitcoin staking.

Ethereum (ETH) currently offers 4% annualized staking returns and will benefit from an ultra-low interest rate environment. Ethena’s USDe uses Bitcoin and Ethereum as backing assets and combines equivalent perpetual futures short positions to generate returns. Decentralized finance platform Pendle’s Bitcoin staking provided floating returns of up to 45% last week. These are all will benefit from the low interest rate environment. At the same time, market demand for interest-rate-sensitive products like tokenized Treasury bonds may weaken.

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