Arthur Hayes Token2049 speech full text: The market may crash after interest rate cuts, but Ethereum's performance may be good

Compiled by: 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 an uproar throughout the audience. In the early morning of September 19th Beijing time, the Federal Reserve is about to hold its interest rate meeting, which is also 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 75 or 50 basis point rate cut. Hayes made an interesting prediction about the future of ETH, suggesting that the decline in US Treasury interest rates could make high-yield tokens more attractive. He compared Ethereum to “internet bonds” and further analyzed its potential. He repeatedly emphasized the yen and reminded everyone to follow the exchange rate of the US dollar against the yen, “that’s the only important thing”.

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

I think there is about a 60% to 70% chance that the Fed will choose to cut rates by 75 or 50 basis points. Before discussing Crypto Assets, I would like to express my opinion that I believe it is a huge mistake for the Fed to cut rates in the current situation of increased government intervention in the United States. I believe that in the days following the Fed’s rate cut, the market will collapse because it will narrow 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 of trading, almost triggering a small financial collapse. Now, the Fed and the market expect them to continue cutting rates very quickly, and we will once again see similar financial pressures.

Back to Cryptocurrency. This is one of my favorite trades in my non-Cryptocurrency investment portfolio. I hold my short-term Treasury bills and collect Interest. This is the yield on a 1-month Treasury bill, which has been hovering around 5.5% for over a year since the Fed stopped raising interest 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 the value while risking capital preservation? When people have a lot of assets, they are unwilling to take certain actions because they can easily make money by holding short-term treasury bonds. This situation creates a chain reaction in the financial markets, including the Cryptocurrency market. I want to ask you, who are the losers when the Intrerest Rate environment changes? It is worth thinking about the Interest income generated by holding the safest risk-free assets when the Intrerest Rate of short-term treasury bonds decreases.

The first reaction is the comparison between five assets in the Ethereum network - I disclose that I hold a large amount of these assets. Fortunately, I haven’t invested in any apartments, but ultimately, this portfolio is very well suited for the environment of Interest Rate reduction. Basically, this means that I have invested in many projects that provide users with Interest income in different forms.

At present, these interest rates are slightly higher or slightly lower than the short-term Treasury Intrerest Rate, 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% return.

Now, some projects perform very well in a high-interest rate environment. Here I’ll take Ondo as an example, but there are actually many other types of Real World Asset (RWA) projects. Basically, the pattern of these projects is like this: ‘You need to buy treasury bonds, we will buy them and put them in some kind of legal structure, and then give you a voucher to pay the interest.’ These projects are based on the pump of interest rates and maintain a high position with a one-way bet. But when the interest rate drops, such products are no longer necessary.

First of all, Ethereum. Many people may not think it has made much of a difference when they hear about Ethereum. The main point of discussion about ETH is that it is considered as “internet bonds”. If it is an internet bond with an annual yield of 4%, and the short-term Treasury bond yield is higher than this, investors naturally tend to favor Treasury bonds. But if the Treasury bond yield rapidly declines (which I think it will), then Ethereum will become more attractive, and the returns I may get from holding Ethereum may exceed the returns I can get from holding dollars.

As you can see, Intrerest Rate is rapidly declining because the Fed is going to cut interest rates and the market will fall. Then they’ll say, ‘Let’s keep doing this because it’s the solution.’ Currently, we can see that the yield is basically on a straight line, while the yield of Ethereum is between 3% and 4%, which is not enough for holders, and that’s why I don’t own it.

As you can see, in the current Bull Market, the performance of Ethereum (ETH) is far inferior to that of BTC. Through ETHfi, you can stake your Ether (ETH), but obviously this strategy has also been hit. Because the yield after staking is only about 3%, and after deducting fees, such a return is not ideal. We need the national bond yield to drop faster, so that the yield of Ether (ETH) becomes more attractive.

Why is this a small issue? Because traders use leverage, and they pay for this leverage. This situation has been going on for many years. This is also the way I started in the Cryptocurrency field: creating basic trades, applying these strategies. This method is relatively simple, just invest funds to earn profits. Again, this is a risky loan, not comparable to the security of US Treasuries. If you are an investor seeking returns, and the returns provided by Ethereum are not attractive enough compared to Treasuries, you may not invest assets in this protocol.

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

Another thing we want to discuss is Interest Rate Derivatives protocol, which allows you to trade fixed and floating Interest Rate. Here is a newly launched product that allows you to stake Cryptocurrency and earn fixed income through the loan buyer protocol. Although this income is attractive, 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 decreases, more people may be unwilling to take on this Interest Rate risk.

Once again, you can now earn up to 9% return with this strategy. It was launched a few weeks ago. This return rate is high and very attractive compared to 4.5%. While there are risks and Smart Contract risks, many investors sensitive to Interest Rate may consider this return rate not high enough, but if I can earn 5.5% Interest Rate, you can try Pendle. Obviously, it has already retraced 50% to 60% of the gains, but if the return rate significantly exceeds the government bond yield, it will be very attractive.

I have talked about how many Cryptocurrency projects are actually terrible. The main reason is the Intrerest Rate problem. I can do these things in a more concise and cheaper way instead of buying some low Liquidity Tokens at a high price. However, in the end, these protocols provide valuable services for people who do not have a US brokerage account or cannot 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 government bonds because they don’t make much money from them. The holding cost of government bonds is very low.

These protocols are very attractive to certain types of investors, especially those who hope to easily earn 5.5% returns. But if we expect the Central Bank to actively cut interest rates in a deteriorating economic environment or financial crisis, then there is no reason to invest money in these RWA (real world assets) protocols. Why should I take on Smart Contract risk to earn 1% or 2% returns? Therefore, I believe that many TVL (total value locked) projects relying on high-yield government bonds will suffer losses when interest rates decline. I’ll use Ondo as an example. I just took its information off the website last night. Its market capitalization is $6 million, and the fully diluted market capitalization (FDV) is very low, you can earn 5.35% returns in their Stable Coin. We expect the current yield to drop by 25 to 50 basis points, with more changes to come 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 think this is because we are in a high interest rate environment. Their products are reasonable, but as I mentioned quickly, there is about five minutes now. I want to delve 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 that 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. That’s 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 due to the fact that the Central Bank of Japan is raising interest rates while the Central Bank of the United States is cutting rates, theoretically, the Exchange Rate should reflect the difference in Interest Rates. Therefore, the Exchange Rate of the US dollar against the Japanese yen should increase, which means that the nominal price you see on the screen should decrease. 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 (the dot plot is a tool for the Central Bank to query each official’s expectations for Interest Rates in the future period), we will see a significant appreciation of the yen.

What does this mean? 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 would borrow Japanese yen with almost no Interest cost, sometimes even without paying any fees. Then, I would invest these borrowed funds in assets with higher returns.

These assets may include US stocks, Nasdaq, S&P 500 index, real estate, and even US Treasury bonds. This trading method is estimated to involve an exposure of up to $20 trillion worldwide, all by people investing through borrowing 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 that you will be dumping assets, dumping stocks (with strong Liquidity), and dumping government bonds (with strong Liquidity). Japan is the world’s largest creditor nation, so US Treasury Secretary Powell and Yellen need to pay attention to this. I think there are about 40 to 50 days left until the US election. They don’t want the thing to happen 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 trades I talked about in my speech today. Therefore, although I talked about a lot of Crypto Assets, what I want you to remember is to follow the Exchange Rate of the US dollar against the yen. This is the only important thing.