Is the upcoming interest rate cut a form of erroneous easing? How will the script unfold?

Written by: Luke, Mars Finance

The crossroads decision

The market is holding its breath, almost viewing the Federal Reserve's interest rate cut as the starting gun for a new round of asset frenzy. However, a warning from JPMorgan is like a boulder thrown into a calm lake: what if this is the "wrong type of easing"?

The answer to this question is crucial. It determines whether the upcoming event will be a "soft landing" comedy that brings joy to all, or a "stagflation" tragedy characterized by stagnant economic growth and high inflation. For cryptocurrencies intertwined with macroeconomic fate, this is not only a matter of direction but also a test of survival.

This article will delve into these two possibilities, attempting to outline how the future would unfold if the script of "error type easing" comes true. We will see that this script will not only reshape the landscape of traditional assets but may also trigger a profound "great differentiation" within the cryptocurrency world, and conduct an unprecedented stress test on the infrastructure of DeFi.

Script 1: The Dual Nature of Interest Rate Cuts

How the script unfolds primarily depends on how we interpret history. Lowering interest rates is not a panacea; its effects entirely depend on the economic environment in which it is released.

Positive Scenario: Soft Landing and Comprehensive Prosperity In this scenario, economic growth is robust, inflation is under control, and the Federal Reserve lowers interest rates to give the economy an extra boost. Historical data is a loyal advocate for this scenario. Research by Northern Trust indicates that since 1980, in the 12 months following the initiation of such "correct rate-cutting" cycles, the U.S. stock market has averaged a return of 14.1%. The logic is simple: lower funding costs lead to increased consumer and investment enthusiasm. For high-risk assets like cryptocurrencies, this means catching a tailwind and enjoying a liquidity feast.

Negative Scenario: Stagflation and Asset Disaster But what if the script takes another turn? Economic growth stagnates, yet inflation stubbornly persists like a tenacious weed, forcing the Federal Reserve to cut interest rates to avoid a deeper recession. This is known as "erroneous rate cuts," synonymous with "stagflation." The United States in the 1970s was a prelude to this script, where the oil crisis and loose monetary policy jointly directed a disaster of economic stagnation and rampant inflation. According to data from the World Gold Council, during that era, the annualized real return on U.S. stocks was a dismal -11.6%. In this drama where almost all traditional assets suffered, only gold stood out, recording an annualized return rate as high as 32.2%.

Goldman Sachs recently raised the probability of a U.S. economic recession and predicted that the Federal Reserve may cut interest rates in 2025 due to an economic slowdown. This warns us that the enactment of a negative scenario is not alarmist.

Script Two: The Fate of the Dollar and the Rise of Bitcoin

In the grand play, the US dollar is undoubtedly the main character, and its fate will directly influence the direction of the script, especially for the crypto world.

A repeatedly verified rule is that the Federal Reserve's easing usually accompanies a weakening of the dollar. This is the most direct benefit for Bitcoin. When the dollar depreciates, the price of Bitcoin denominated in dollars naturally rises.

However, the script of "error-type easing" holds meanings far beyond this. It will become the ultimate test of the theories proposed by two macro prophets of the crypto world—Michael Saylor and Arthur Hayes. Saylor regards Bitcoin as a "digital property" against the continuous devaluation of fiat currencies, a Noah's Ark to escape the traditional financial system that is destined to collapse. Hayes, on the other hand, believes that the vast debt of the United States leaves it no choice but to "print money" to cover the fiscal deficit. A "wrong interest rate cut" is precisely the key step for this prophecy to become reality, at which point capital will flood into hard assets like Bitcoin seeking refuge.

However, this script also buries a huge risk. While a weakening dollar establishes the narrative of Bitcoin as king, the cornerstone of the crypto world—stablecoins—are facing erosion. Stablecoins with a market value of over $160 billion have reserves almost entirely composed of dollar assets. This is a huge paradox: the macro forces driving Bitcoin's rise may be hollowing out the actual value and credibility foundation of the financial instruments used to trade Bitcoin. If global investors lose confidence in dollar assets, stablecoins will face a severe trust crisis.

Script Three: The Collision of Yields and the Evolution of DeFi

Interest rates are the guiding stick for capital flow. When the script of "wrong type of easing" is performed, there will be an unprecedented collision between the yields of traditional finance and decentralized finance (DeFi).

U.S. Treasury yields are the global "risk-free" benchmark. When they can provide stable returns of 4%-5%, the similar yields in higher-risk DeFi protocols appear inadequate by comparison. This opportunity cost pressure directly limits the influx of fresh capital into DeFi.

To break the deadlock, the market has given rise to "tokenized U.S. Treasury bonds," attempting to bring the stable returns of traditional finance onto the blockchain. However, this could be a "Trojan horse." These secure Treasury bond assets are increasingly being used as collateral for high-risk derivatives trading. Once the "wrong interest rate cut" occurs, leading to a decline in Treasury yields, the value and attractiveness of tokenized Treasuries will also diminish, potentially triggering capital outflows and cascading liquidations, precisely transmitting the macro risks of traditional finance to the heart of DeFi.

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 challenges, 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 (RWA) and provide sustainable real returns.

Script Four: Signals and Noise - The Great Differentiation in the Crypto Market

When the macro "noise" overwhelms everything, we need to listen more to the "signals" from blockchain. Data from institutions like a16z shows that regardless of market fluctuations, the core data of developers and users continues to grow steadily. The construction has never stopped. Veteran investors like Pantera Capital also believe that as the regulatory headwinds turn into tailwinds, the market is entering the "second phase" of a bull market.

However, the script of "error-type easing" may 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?

Under this scenario, Bitcoin's "digital gold" attribute will be infinitely magnified, becoming the preferred choice for capital to hedge against inflation and the depreciation of fiat currency. The situation for many altcoins 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 altcoins and flow into Bitcoin, causing a huge differentiation within the market. Only those protocols with strong fundamentals and real revenue will survive in this wave of "flight to quality."

Summary

The crypto market is being pulled by two enormous forces: on one side is the macro gravitational pull of "stagflationary easing," while on the other side is the endogenous power driven by technology and applications.

The future script will not be single-threaded. A "wrong interest rate cut" may simultaneously benefit Bitcoin and bury most altcoins. This complex environment is forcing the crypto industry to mature at an unprecedented pace, and the true value of protocols will be tested in a harsh economic climate.

For everyone involved, understanding the logic of different narratives and the complex tension between the macro and micro will be key to navigating future cycles. This is no longer just a bet on technology; it is a grand gamble about which narrative you choose to believe at critical junctures in global economic history.