BitMEX co-founder Arthur Hayes delivered a special speech "Thoughts on Macroeconomics Current Events" at TOKEN2049 yesterday, mentioning the possible impact of the U.S. Federal Reserve's interest rate cut. Although market participants generally believe that the impact of interest rate cuts on the market outlook is optimistic, Arthur Hayes believes that after interest rates are cut, risk markets, including cryptocurrency, may collapse within a few days.

Before talking about the impact on markets, Arthur Hayes blasted the Fed for considering rate cuts amid increased dollar issuance and government spending:

"This is a huge mistake, because even though the public is anticipating a rate cut and thinking that stocks and other markets are going to rise sharply, I think the market is going to crash a few days after the Fed cuts rates."

Will a rate cut crash the market? It turned out to be these two reasons

Arthur Hayes said a rate cut of either 1 yard (0.25%) or 2 yards (0.5%) would cause risk markets to fall as it narrows the interest rate differential between the dollar and the yen. He cited as an example that the appreciation of the yen from 162 (USD/JPY) to 142 a few weeks ago almost caused a mini-financial collapse, and that this financial pressure will happen again after the interest rate cut.

During TOKEN2049, Arthur Hayes was interviewed by CoinDesk. He emphasized two reasons why he believed that the interest rate cut was a wrong decision. The first reason is that the United States is still experiencing inflation. If the Federal Reserve cuts interest rates at this time, inflation will intensify; the second reason is that the interest rate differential between the United States and Japan will narrow with the interest rate cut. This could lead to a sharp appreciation of the yen, which could trigger the unwinding of yen arbitrage trades.

There are indeed traces of Arthur Hayes's argument. After the Bank of Japan raised interest rates by 0.25%, the market in early August was affected by the ensuing yen arbitrage unwinding, causing Bitcoin to fall from US$64,000 to US$50,000 at that time.

In a formal interview with CoinDesk the next day, Arthur Hayes gave a more complete answer:

“I don’t think a 1-cent rate cut will change much because everyone is expecting at least a 1-cent rate cut. If it’s a 2-digit rate cut, it would be a nuclear disaster for financial markets. Within one or two trading days after the rate cut , you will see a big rally because everyone believes that higher interest rate cuts are better for the market, but in fact, I think this reflects deeper problems in the global financial system, which will cause prices to fall further."

Falling Treasury yields will boost the Ethereum bull market

Arthur Hayes said that many DeFi yields are either slightly higher than the yield of U.S. Treasury bonds, or slightly lower than the yield of U.S. Treasury bonds; after the Federal Reserve cuts interest rates, the interest rates of Treasury bonds will gradually fall from 5.5% to close to 0% level. This is why he still invests in Ethereum even though Ethereum is not performing as well as Bitcoin and the yield is lower than 4% of Treasury bonds, like Internet Bonds. Because he is convinced that when government bond yields fall rapidly with interest rate cuts, Ethereum will become truly valuable money and prompt the Ethereum bull market to explode.

Near-zero interest rates also mean investors will look for income elsewhere. In addition to Ethereum, Arthur Hayes proposed two DeFi protocols with higher yields than treasury bonds. They use Bitcoin and Ethereum as reserve assets, combined with equivalent perpetual contract positions to generate additional stable income. currency protocol Ethena ($ENA); and Pendle ($PENDLE), which has a floating return rate of 45% on Bitcoin pledges. He said that he currently holds a large amount of these two tokens.

The era of central banks is coming to an end

In the past few years, Scottish market analyst Russel Napier has repeatedly pointed out that developing countries that focus on reducing debt and GDP ratios have controlled the money supply and deliberately created liquidity for areas such as manufacturing and reindustrialization to maintain inflation at The water level is so high that central bank decisions become irrelevant. Arthur Hayes also expressed humor in this discussion:

“I 100% agree with the prediction that the era of central banks is over and politicians will take over and require banks to create liquidity for specific sectors of the economy. So you will see soft and hard capital controls in different regions, which means Cryptocurrency will be the only asset that can get you out of this system.”