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

Organizer: Weilin, PANews

"It's fucking fed day," on September 18 at Token 2049 held in Singapore, Maelstrom Fund's CIO Arthur Hayes delivered a keynote speech centered around the macroeconomic environment, and his first sentence drew screams from the audience. In the early hours of September 19 Beijing time, the Federal Reserve is set to hold a monetary policy meeting, which is the most important decision of the year, as the Fed's decision on interest rate cuts directly relates to the future direction of the market.

Hayes stated that there is about a 60% to 70% chance that the Fed will choose to cut rates by 75 or 50 basis points. Hayes made an interesting prediction about the prospects of ETH, believing that a decline in U.S. Treasury yields could indeed make high-yield tokens more attractive. He likened Ethereum to "internet bonds" and further analyzed its potential. He emphasized the Japanese yen multiple times and reminded everyone to pay attention to the USD/JPY exchange rate, saying, "that's the only important thing."

Here are the organized speech contents from the scene (reference AI translation):

I believe there is about a 60% to 70% chance that the Fed will choose to cut rates by 75 or 50 basis points. Before discussing cryptocurrencies, I want to express my view that it would be a huge mistake for the Fed to choose to cut rates in the current situation where the U.S. government is increasing its intervention. I believe that within days after the Fed cuts rates, the market will collapse, as this will narrow the interest rate differential between the dollar and the yen. A few weeks ago, we saw the yen drop from 162 to 142 in about 14 days of trading, almost triggering a mini financial collapse. Now, the Fed and the market expect them to continue cutting rates very quickly, and we will see similar financial pressures again.

Back to cryptocurrencies. This is one of my favorite trades in my non-crypto 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% since the Fed stopped raising rates over a year ago.

When you have enough capital and earn a 5.5% return, you don't need to do much. Why take risks? Why try to appreciate your capital at the risk of capital preservation? When people have a lot of assets, they are reluctant to take certain actions because they can easily make money by holding short-term Treasury bills. This situation has created a chain reaction in financial markets, including the cryptocurrency market. I want to ask you, in a changing interest rate environment, who are the losers? When short-term Treasury yields decline, the interest income generated from holding the safest risk-free assets is a thought-provoking question.

The first reaction is a comparison among five assets in Ethereum—I'll disclose that I hold a lot of these assets. Fortunately, I haven't invested in any apartments, but ultimately, this portfolio is very well-suited to a declining interest rate environment. Basically, this means I have invested in many projects that provide interest income to users in different forms.

Currently, these yields are either slightly above or slightly below the short-term Treasury yield, which puts pressure on price performance. After all, why invest in riskier DeFi applications? You could easily 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. I’m just using Ondo as an example; there are actually many other types of real-world asset (RWA) projects. Basically, the model of these projects is: "You need to buy Treasury bills, we will buy them, place them in some legal structure, and then give you a certificate that pays interest." These projects are based on a one-way bet that rates will rise and stay high. But when rates decline, there is little reason for such products to exist.

First, Ethereum. Many people hear about Ethereum and may feel it hasn't made any significant changes. The main discussion point about ETH is that it is seen as "internet bonds." If it is an internet bond with a 4% annual yield, and the yield on short-term Treasury bills is higher than that, then investors will naturally prefer Treasury bills. But if Treasury yields decline rapidly (which I believe will happen), then Ethereum will become more attractive, and the returns I earn from holding Ethereum may exceed the returns from holding dollars.

As you can see, rates are declining rapidly because the Fed is about to cut rates, and the market will drop. Then they will say, "Let’s keep doing this because it’s the way to solve the problem." Currently, what we can see is that yields are basically staying in line, while Ethereum's yield is between 3% and 4%, which is not enough for holders, which is why I don’t hold it.

As you can see, in the current bull market, Ethereum's performance is far inferior to Bitcoin. Through ETH staking (ETHfi), you can stake your Ethereum, but clearly, this strategy has also taken a hit. Because the yield after staking is only about 3%, and after fees, such returns are not ideal. We need Treasury yields to decline faster for Ethereum's yield to become more attractive.

Why is this a small problem? Because traders use leverage, and they pay for this leverage. This situation has persisted for many years. This is also how I started in the cryptocurrency space: creating foundational trades and applying these strategies. This method is relatively simple; you just need to put in capital to earn returns. Again, this is a risky loan that cannot be compared to the safety of U.S. Treasuries. If you are a yield-seeking investor, and the yield provided by Ethereum is not attractive compared to Treasuries, you may not put your assets into such protocols.

Here is a chart showing the comparison of Ethena yields with Treasuries, data from earlier this year. This is very appealing. We see yields of 30%, 40%, 50%, 60%, etc., compared to a 5.5% yield. I would put my money into this product. But now, its actual yield is around 4.5%. Therefore, prices are under pressure because people are asking, why should I put my money into a protocol with a yield lower than Treasuries?

Another thing we need to discuss is interest rate derivatives protocols that allow you to trade fixed and floating rates. Here is a newly launched product that allows you to stake cryptocurrencies and earn fixed returns through a loan buyer agreement. Although this yield is attractive, it comes with certain risks. I believe the yield is not high enough to attract a large number of people to switch from the 5.5% Treasury yield to this product. A similar situation is that if yields decline, more people may be unwilling to take on this interest rate risk.

Once again, you can now earn up to 9% through this strategy. This was just launched a few weeks ago. This yield is high and very attractive compared to 4.5%. For some people, although there are risks and smart contract risks, many interest-sensitive investors may think this yield is still not high enough, but if I can earn a 5.5% rate, you can try Pendle. Clearly, it has already retraced 50% to 60% of its gains, but if the yield significantly exceeds Treasury yields, it will be very attractive.

I have previously talked about how many cryptocurrency projects are actually quite bad. The main reason is the interest rate issue; I can do these things in a more straightforward and cheaper way rather than paying high prices for some illiquid tokens. But ultimately, these protocols provide valuable services for those who do not have U.S. brokerage accounts or cannot access traditional investments. There are many very wealthy people in this room, and if you go to your private banker, they may recommend something unrelated to U.S. Treasuries because they don’t make much money from it. The holding cost of Treasuries is very low.

These protocols are very attractive to certain types of investors, especially those who want to easily earn a 5.5% return. But if we expect central banks to actively cut rates in a deteriorating economic environment or financial crisis, then there is no reason to put money into these RWA (real-world asset) protocols. Why take on smart contract risk to earn 1% or 2%? Therefore, I believe many projects that rely on high-yield Treasuries will suffer losses when rates decline. I use Ondo as an example. I just took its information off the website last night. It has a market cap of $6 million, and the FDV (fully diluted valuation) is very low; you can earn 5.35% in their stablecoin. We expect yields to decline by 25 to 50 basis points now, and there will be more changes in the future.

In relative terms, 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 are about five minutes left. I now want to delve into why I believe the more the Fed cuts rates, the more dissatisfied the market will be with what happens next. I really hope that if you remember one thing tonight, it is this: when you are at a party and get drunk, open your phone and check the USD/JPY exchange rate. That is the only important thing. Because if the Fed suddenly cuts rates by 50 or 75 basis points, you will see a very negative reaction in the dollar.

To reiterate, as the Bank of Japan is raising rates while the U.S. central bank is cutting rates, theoretically, the exchange rate should reflect the interest rate differential. Therefore, the USD/JPY exchange rate should rise, which means the nominal price you see on the screen should fall. If I expect the central bank to unexpectedly cut rates significantly, or if they show very aggressive rate cut expectations in the dot plot (the dot plot is a tool for querying each official's expectations for rates over a certain period), we will see a significant appreciation of the yen.

What does this mean? Yen carry trades may be one of the most commonly used trading strategies over the past thirty years. As a retail investor, company, or central bank, I would borrow yen at almost no interest cost, sometimes even without paying any fees. Then, I would invest these borrowed funds into higher-yielding assets.

These assets may include U.S. stocks, NASDAQ, S&P 500, or even real estate and U.S. Treasuries. This trading method is estimated to involve up to $20 trillion in exposure globally, all through people borrowing yen to invest.

If this interest rate appreciates rapidly, your profits will be quickly wiped out. Therefore, your risk managers will remind you to "cover the risk." This means you will sell assets, sell stocks (which are liquid), and sell Treasuries (which are liquid). Japan is the world's largest creditor nation, so U.S. Treasury Secretary Powell and Yellen need to pay attention to this. I believe there are about 40 to 50 days until the U.S. election. The last thing they want to see is Trump’s approval ratings high while the S&P drops 20%. That’s why I believe they will actively cut rates. They will see the yen appreciate and provide more monetary supply, which should drive all the trades I talked about today. So, although I talked a lot about cryptocurrencies, the key point I want you to remember is: pay attention to the USD/JPY exchange rate. That is the only important thing.