- Hayes said ahead of Wednesday's expected Fed rate cut that the era of central banks is over.
- Hayes said Athena's USDe and Pendle's BTC shares could benefit from the impending low interest rate regime.
- Demand for tokenized U.S. Treasuries, an interest rate-sensitive product, could weaken if interest rates remain low.
Arthur Hayes, Maelstrom's chief investment officer and BitMEX co-founder, said risk assets, including cryptocurrencies, could collapse in the days after the Fed's first interest rate cut, which is expected to be announced on Wednesday. He made a bold statement.
The Federal Reserve is expected to announce its first interest rate cut since 2020 later today, starting a so-called liquidity easing cycle that has historically boded well for Bitcoin (BTC).
However, an impending rate cut would further exacerbate inflation problems, lead to a stronger yen, and trigger widespread risk aversion, Hayes explained in an exclusive interview with CoinDesk on the sidelines of the Token2049 conference in Singapore.
“Inflation remains a problem in the United States, and cutting interest rates is a bad idea. The government is the biggest driver of persistent price pressures. Borrowing cheaply will only fuel inflation even more,” Hayes said.
Hayes added: “The second reason is that the rate cut will narrow the interest rate differential between Japan and the US. This could lead to a sharp appreciation of the yen and cause an unwinding of the yen carry trade.”
In early August, when the Bank of Japan raised its standard borrowing cost from zero to 0.25%, markets experienced the destabilizing effects of a strong yen and the resulting unwinding of yen carry trades. Bitcoin fell from about $64,000 to $50,000 in less than a week, according to data from CoinDesk.
Hayes said the only thing that matters in the short term is USD/JPY.
Most analysts expect the Bank of Japan to raise rates further in the coming months as the Fed chooses a different path. The difference in policy direction means the yen could appreciate further, forcing investors to exit long positions in risky assets backed by yen-denominated loans.
Hayes believes U.S. interest rates will drop completely from the current 5.25% to 5.5% range to near zero.
“I think the initial reaction will be negative and the central bank reaction will be to do more.” [cuts] To stop the crisis. So I think it's a bad idea to cut rates, but we're going to cut rates anyway, so it's going to be zero soon,” Hayes explained.
Easable takes the lead
With interest rates near zero, investors may once again seek yield elsewhere, leading to a bull market in yield-producing parts of the crypto market such as Ether, Etena's USDe, and Pendle's BTC staking. This means there is a possibility of relapse.
Ether (ETH), which offers a staking yield of 4% per year, will ultimately benefit from ultra-low interest rates.
Ethena’s USDe uses BTC and ETH as backing assets and combines them with short perpetual futures positions of equal value to generate yield. You will also benefit from BTC staking on DeFi platform Pendle, which offers a variable yield of 45% as of last week. Hayes explained the same thing.
Meanwhile, demand for tokenized U.S. Treasuries, an interest rate-sensitive product, may weaken.
The era of central banks is over
Scottish market strategist Russell Napier has repeatedly said in recent years that central banks are rapidly becoming worthless as developed world governments focus on lowering debt-to-GDP ratios and control the money supply. It's here.
Napier said the government would rely on targeted liquidity creation in areas such as manufacturing and reindustrialization, while keeping inflation high.
Hayes believes the same and sees this as a positive development for the crypto market. Maelstrom is a cryptocurrency investment fund managed by the Arthur Hayes family office.
“I agree 100% with that prediction. The era of central banks is over. Politicians will take over and tell banks to create liquidity in specific sectors of the economy,” Hayes quipped.
“So you're going to see soft capital controls and hard capital controls in different places, which means that the only asset that's portable around the world and frees you from that system and that you can own is cryptocurrencies. That means,” Hayes added.
