The spread between Ethereum’s Composite Staking Rate and the Effective Federal Funds Rate (EFFR) has remained negative since mid-2023.
However, according to crypto trading and institutional brokerage firm FalconX, two key factors could push the spread into positive territory by mid-2025, creating a “double-whammy effect” that would further boost ETH prices.
FalconX recently pointed out in an investor report that the Federal Reserve recently decided to cut interest rates and is expected to continue to cut interest rates next year. According to CME FedWatch data, the futures market shows that there is an 85% probability that the federal funds rate will fall below 3.75% by March 2025, and a 90% probability of further reduction to 3.5% by June.
Lower U.S. interest rates will reduce the yields of traditional assets such as U.S. Treasuries, narrowing the spread with Ethereum staking. Data shows that the staking yield is currently hovering around 3.2%. David Lawant, head of research at FalconX, wrote in the report: "In the overall crypto bull market surrounding Ethereum prices, we have not seen a large positive spread between Ethereum staking rates and risk-free rates. The only time ETH's staking rate was significantly higher than the risk-free rate for a relatively long period of time was at the end of 2022, when the industry was struggling with the FTX crash at the bottom of the last bear market."
Data from YCharts shows that Ethereum's transaction fees, which play an important role in staking rewards, climbed to their highest level in nearly two months last week.
FalconX said that while Ethereum transaction fees are still well below previous bull run peaks, the recent rise reflects increased activity on its blockchain. Higher transaction fees increase staking yields, providing Ethereum stakers with more attractive returns.
FalconX believes that the combination of falling U.S. interest rates and rising Ethereum yields could turn the spread positive in the next two quarters, making Ethereum more competitive with traditional yield-yielding assets.
However, Jamie Coutts, chief crypto analyst at Real Vision, believes that institutional investors will be more willing to obtain staking returns through regulated products such as ETFs. "Until the U.S. SEC approves such issuance, demand may be suppressed," he said.
Coutts added that while more established asset managers and private wealth firms may begin investing directly, demand for direct investing by most traditional institutions is likely to be “slow to develop.” (Decrypt)