Arthur Hayes' full speech at Token 2049: The market may crash after the interest rate cut, but ETH's performance may be good.

Author: Weilin, PANews

“It’s fucking fed day.” At Token 2049 held in Singapore on September 18th, Arthur Hayes, CIO of Maelstrom Fund, delivered a keynote speech on the macroeconomic environment. His first sentence caused a scream throughout the audience. In the early morning of September 19th Beijing time, the Federal Reserve is about to hold a monetary policy meeting, which is the most important decision this year. The Fed’s decision on interest rate cuts directly affects the future market trend.

Hayes said there is a 60% to 70% chance that the Fed will choose a rate cut of 75 or 50 basis points. Hayes made an interesting prediction about the future of ETH, suggesting that the decline in US Treasury Interest Rate may indeed make high-yield tokens more attractive. He likened Ethereum to an ‘Internet bond’ and further analyzed its potential. He emphasized the yen multiple times and reminded everyone to follow the Exchange Rate of the US dollar against the yen, ‘that’s the only thing that matters’.

The following is the speech content compiled on-site by PANews (reference AI translation):

I believe there is a 60% to 70% chance that the Federal Reserve will choose to cut interest rates by 75 or 50 basis points. Before discussing Crypto Assets, I would like to express my opinion that it is a huge mistake for the Federal Reserve to choose to cut interest rates in the current situation of increased government intervention in the United States. I believe that in the days following the Fed’s interest rate cut, the market will collapse as it narrows the Interest Rate differential between the US dollar and the Japanese yen. A few weeks ago, we saw the yen drop from 162 to 142 in about 14 days, which almost triggered a minor financial crisis. Now, the Fed and the market expect them to continue cutting interest rates very quickly, and we will once again see similar financial pressures.

Back to Crypto Assets. This is one of my favorite trades in my non-Crypto Assets portfolio. I hold my short-term treasury bills and receive Interest. This is the yield of a 1-month treasury bill, which has been hovering around 5.5% for over a year since the Fed stopped raising rates.

When you have enough capital and get a 5.5% return, you don’t need to do much. Why take risks? Why try to increase value while risking capital preservation? When people have a large amount of assets, they are reluctant to take certain actions because they can easily make money by holding short-term treasury bonds. This situation has created a chain reaction in the financial markets, including the cryptocurrency market. I want to ask you, who are the losers when the interest rate environment changes? It is worth thinking about the interest income that can be generated by holding the safest risk-free assets when the interest rate of short-term treasury bonds drops.

The first reaction is the comparison between the five assets of ETH Bank-I’ll disclose that I hold a large amount of these assets. Luckily, I haven’t invested in any apartments, but ultimately, this portfolio is very well-suited to the environment of declining interest rates. Essentially, this means that I’ve invested in many projects that provide users with interest income in various forms.

Currently, these interest rates are either slightly higher or slightly lower than the Intrerest Rate of short-term Treasury bills, which puts pressure on price performance. After all, why invest in more risky Decentralized Finance applications? You can simply call your broker and put your money into Treasury bills to earn a 5.5% yield.

Now, some projects perform very well in a high Intrerest Rate environment. Here I am just using Ondo as an example, but in fact, there are many other types of Real World Asset (RWA) projects. Basically, the pattern of these projects is like this: ‘You need to buy Treasury bills, we will buy them and put them in some legal structure, and then give you a voucher to pay Interest.’ These projects are based on Intrerest Rate pump and maintain a high position of one-way bets. But when Intrerest Rate drops, such products are no longer necessary.

First, ETH Square. Many people may not think it has made any big changes when they hear about ETH Square. The main point of discussion about ETH is that it is considered a “internet bond.” If it is an internet bond with an annual yield of 4%, and the yield of short-term treasury bonds is higher than this, investors naturally tend to prefer treasury bonds. But if the yield of treasury bonds declines rapidly (which I think will happen), then ETH Square will become more attractive, and the return I get from holding ETH Square may exceed the return from holding dollars.

As you can see, the Intrerest Rate has dropped rapidly due to the Fed’s upcoming rate cut and the market will decline. Then they will say, ‘Let’s continue to do this because this is the solution.’ Currently, we can see that the yields are basically on the same line, with Ethereum’s yield between 3% and 4%, which is not enough for holders, and this is why I don’t hold it.

As you can see, in the current bull market, Ethereum’s performance is far behind Bitcoin. With ETH stake (ETHfi), you can stake your Ethereum, but obviously this strategy has also been hit. Because the yield after staking is only about 3%, and after deducting fees, this kind of return is not ideal. We need the bond yield to drop faster so that Ethereum’s returns become more attractive.

Why is this a small problem? Because traders use leverage and they pay for this leverage. This situation has been going on for many years. This is also how I started in the field of Cryptocurrency: creating basic trades and applying these strategies. This approach is relatively simple, as it only requires capital to earn profits. Once again, it is important to note that this is a risky loan and cannot be compared to the security of US government bonds. If you are an investor seeking returns and the returns offered by Ethereum are not attractive enough compared to government bonds, you may not allocate your assets to this protocol.

Here is a chart showing the comparison between Ethena’s yield and government bonds, data from earlier this year. This is very attractive. We see the yield of 30%, 40%, 50%, 60%, etc. relative to the yield of 5.5%. I will invest my money in this product. But now, its actual yield is about 4.5%. Therefore, the price has been suppressed because people are asking, why should I invest money in a protocol with a lower yield than government bonds?

Another thing we want to discuss is the Interest Rate Derivatives protocol, which allows you to trade fixed and floating Interest Rates. Here’s a newly launched product that allows you to stake Cryptocurrency and earn a fixed income through the buyer protocol. Despite its attractive returns, it comes with certain risks. I think the yield is not high enough to attract a large number of people to switch from the 5.5% government bond yield to this product. Similarly, if the yield declines, more people may be unwilling to take on this Interest Rate risk.

Once again, you can now earn up to 9% interest through this strategy. This was launched just a few weeks ago. This interest rate is very high, much more attractive than 4.5%. For some people, although there are risks and Smart Contract risks, many investors sensitive to Interest Rate may consider this interest rate not high enough. But if I can earn 5.5% Interest Rate, you can try Pendle. Clearly, it has already given back 50% to 60% of the gains, but if the interest rate significantly exceeds the national bond yield, it will be very attractive.

I have talked about how many Cryptocurrency projects are actually bad. The main issue is the Interest Rate problem. I can do these things in a simpler and cheaper way instead of paying a high price to buy low Liquidity Tokens. But in the end, these protocols provide valuable services for people who don’t have a US brokerage account or can’t access traditional investments. There are many very wealthy people in this room. If you go to your private banker, they may recommend something unrelated to US Treasury bonds because they don’t make much money from them. The holding cost of Treasury bonds is very low.

These protocols are very attractive to certain types of investors, especially those who are looking to easily earn a 5.5% return. However, if we anticipate that the Central Bank will actively lower interest rates in a deteriorating economic environment or financial crisis, then there would be no reason to invest in these Real World Assets (RWA) protocols. Why would I take on the risk of Smart Contracts to earn a 1% or 2% return? Therefore, I believe that many TVL projects that rely on high-yield government bonds will suffer losses when the interest rate decreases. Let’s take Ondo as an example. I just took its information off the website last night. Its Market Cap is $6 million, and the FDV (Fully Diluted Market Cap) is very low. You can earn a 5.35% return in their Stable Coin. We expect the current yield to decrease by 25 to 50 basis points, with more changes in the future.

Based on the relative situation, if you look at other charts they have released, you will find that their trading prices are lower than when they were listed earlier this year, and I believe this is because we are in a high interest rate environment. Their products are reasonable, but as I quickly mentioned, there is about five minutes now. I want to go into why I think the more the Fed cuts interest rates, the more dissatisfied the market will be with what happens next. I really hope everyone, if you only remember one thing tonight, it is this: when you get drunk at a party, open your phone and check the Exchange Rate of the US dollar against the Japanese yen. This is the only important thing. Because if the Fed suddenly cuts interest rates by 50 or 75 basis points, you will see a very negative reaction in the US dollar.

I would like to reiterate that theoretically, the Exchange Rate should reflect the difference in Intrerest Rates, as the Central Bank of Japan is raising interest rates while the Central Bank of the United States is cutting them. Therefore, the Exchange Rate of the US dollar against the Japanese yen should rise, which means that the nominal price you see on the screen should fall. If I anticipate that the Central Bank will unexpectedly cut interest rates significantly, or if they show very aggressive interest rate cut expectations in the dot plot (a tool for the Central Bank to query each official’s expectations for the future Intrerest Rate over a period of time), we will see a sharp appreciation of the yen.

What does this mean? Japanese Yen Arbitrage trading may be one of the most commonly used trading strategies in the past thirty years. As an individual investor, company, or central bank, I can borrow Japanese Yen with virtually no interest cost, sometimes even without paying any fees. Then, I invest these borrowed funds in assets with higher returns.

These assets may include US stocks, Nasdaq, S&P 500 index, and even real estate and US government bonds. This trading method is estimated to involve a leverage of up to $20 trillion globally, all invested by borrowing Japanese yen.

If this Intrerest Rate appreciates rapidly, your profits will be quickly wiped out. Therefore, your risk manager will remind you to ‘cover the risk’. This means you will be dumping assets, dumping stocks (strong Liquidity), dumping government bonds (strong Liquidity). Japan is the world’s largest creditor nation, so US Treasury Secretary Powell and Yellen need to follow this. I think there are about 40 to 50 days left until the US election. The last thing they want is for Trump’s approval rating to be high and the S&P to fall 20%. That’s why I believe they will actively cut interest rates. They will see the yen appreciate and provide more currency supply, which should drive all the trades I talked about today. Therefore, although I talked a lot about Cryptocurrency, what I want you to remember is to follow the Exchange Rate of the US dollar against the yen. That’s the only important thing.