Expect Crypto Bulls to Return as Fed Cuts Rates
A Weekly Look at Key Moves in Crypto and Market Analysis
Welcome back to Distributed Ledger. This week, we dive into the implications of one significant development: the Federal Reserve’s recent interest rate cut. After a four-year inertia, the Fed has sliced its key interest rates by half a percentage point. With traders anticipating up to an additional 100 basis points of cuts by year’s end, it begs the question: What does this mean for the crypto landscape?
The Impact of Rate Cuts on Decentralized Finance (DeFi)
According to Chris Rhine, a portfolio manager at SPDR Galaxy ETFs, the renewed vigor in decentralized finance (DeFi) lending protocols is a topic worth exploring. For those unaware, DeFi encompasses financial services that leverage blockchain technology, enabling peer-to-peer transactions while mitigating the need for middlemen. Most of these transactions operate via smart contracts—automated computer programs that execute specific actions upon meeting defined conditions.
The first DeFi summer thrived in 2020, shortly after the Fed embarked on rate cuts in response to the COVID-19 pandemic. Investors inundated platforms like Aave, Compound, MakerDAO, and Uniswap, all attracted by the promise of superior returns, albeit accompanied by higher risks. Remarkably, borrowing rates on certain decentralized platforms soared to an astonishing 30% during this time. Fast forward to March 2022, when the Fed initiated its rate-hiking campaign, and many of those platforms suffered crippling setbacks. As risk-free rates climbed—U.S. Treasury bills even yielded over 5%—many investors shied away from the unpredictable world of crypto, opting for safer havens.
There was a tangible impact on the DeFi sector; the total value locked in DeFi protocols plummeted, hitting a cycle low of under $40 billion by December 2022 after a peak of almost $180 billion in November 2021. As of Tuesday, however, that figure rebounded to around $87 billion, indicating a potential resurgence. Rhine remarks that as the Fed continues to cut rates, certain DeFi lending protocols may reestablish themselves as attractive options for investors seeking better returns.
Insights on Stablecoins
One particular area to monitor is the supply of stablecoins. These are cryptocurrencies pegged to other assets, typically the U.S. dollar. Rhine notes that an increase in the supply of stablecoins often signals a growing demand for these digital assets and may result in more investments flowing into blockchain ecosystems. As such, savvy investors should keep a close eye on the movements in stablecoin supply, which could serve as a leading indicator for the crypto market’s overall health.
Legal Turbulence: Caroline Ellison’s Sentencing
In the realm of legal developments, former Alameda Research CEO Caroline Ellison, who was also the ex-girlfriend of FTX co-founder Sam Bankman-Fried, received a two-year prison sentence. Ellison’s cooperation during the investigations into the massive fraud perpetrated by Bankman-Fried, which involved channeling billions from FTX customer deposits to Alameda Research, led to prosecutors advocating for a lenient sentence. Bankman-Fried himself was sentenced to an astonishing 25 years behind bars—highlighting the severe consequences of misconduct in the crypto space.
Regulatory Actions: TrustToken and TrueCoin Settlements
Crypto entities TrustToken and TrueCoin, now operating under the name Archblock, have recently settled allegations brought forth by the U.S. Securities and Exchange Commission (SEC). The SEC accused these companies of engaging in fraud and unregistered sales regarding their stablecoin TrueUSD, which is supposed to maintain a 1:1 peg to the U.S. dollar.
The settlement, pending court approval, includes $163,766 in civil penalties for each company and a repayment of over $370,000 in profits and interest from TrueCoin. The SEC claims that a considerable portion of the assets supposed to back TrueUSD had been riskily allocated to an offshore investment fund instead. By September 2024, it’s alleged that a staggering 99% of reserves backing TrueUSD were invested in speculative avenues.
Conclusion: Riding the Crypto Wave
The latest moves by the Federal Reserve could signal a notable shift in the cryptocurrency landscape. With rate cuts, the potential resurgence of DeFi lending protocols, and fluctuating stablecoin supplies may offer new investment opportunities that discerning investors should watch closely. The market is always evolving, and those with a keen eye and a strong understanding of traditional financial principles will be poised to capitalize on these changes. Stay informed, stay vigilant, and don’t shy away from the conversations shaping our financial future.
