The Crossroads of the Crypto Market: Analyzing Potential Scenarios in the Future Economic Environment

The market is holding its breath, hoping that the Federal Reserve's rate cut will serve as the starting gun for an asset frenzy. However, some analysts have raised a thought-provoking question: what if this is "the wrong type of easing"? The answer to this question will determine whether we will witness a joyful "soft landing" comedy or fall into the tragic "stagflation" of stagnant economic growth coupled with high inflation. For cryptocurrencies closely tied to the fate of the macroeconomy, this is not only about choosing a direction but also a test of survival.

Let's delve into these two possibilities and try to outline how the "error-type easing" scenario might unfold if it becomes a reality. We will see that this scenario will not only reshape the landscape of traditional assets but could also trigger a profound "great divergence" within the crypto world and put unprecedented pressure on the infrastructure of decentralized finance (DeFi).

The Double-Edged Sword Effect of Interest Rate Cuts

Lowering interest rates is not a universal remedy; its effectiveness entirely depends on the current economic environment. We can imagine two distinctly different scenarios:

1. Soft landing and widespread prosperity: In this ideal scenario, economic growth is robust, inflation is under control, and interest rate cuts aim to further stimulate the economy. Historical data supports this view. Research indicates that since 1980, in the 12 months following the initiation of such "correct interest rate cut" cycles, the average return of the US stock market has reached 14.1%. In this environment, high-risk assets such as encryption currencies may experience a strong surge.

2. Stagflation and Asset Disaster: However, if economic growth is weak and inflation remains high, the Federal Reserve may be forced to cut interest rates to avoid a deeper recession, which would be a completely different situation. This is known as "mistaken interest rate cuts," which could lead to "stagflation." The United States experienced such a situation in the 1970s when the oil crisis and loose monetary policy together caused a scenario of economic stagnation and rampant inflation. During that decade, the annualized real return on U.S. stocks plummeted to -11.6%, while gold recorded an annualized return of 32.2%.

Recently, some investment banks have raised their expectations for the probability of a recession in the United States and predicted that the Federal Reserve may cut interest rates in 2025 due to economic slowdown. This warns us that the negative scenario is not entirely impossible.

The Trend of the Dollar and the Fate of Bitcoin

On the macroeconomic stage, the US dollar is undoubtedly the protagonist, and its fate will directly influence the entire storyline, especially its impact on the crypto market.

A commonly observed phenomenon is that the Federal Reserve's easing policies are often accompanied by a weakening of the dollar. This is directly beneficial for Bitcoin, as the price of Bitcoin denominated in dollars naturally rises.

But the script significance of "error-type easing" is more far-reaching. It will become the ultimate test of the theories of two famous analysts in the crypto market. One views Bitcoin as a "digital property" to combat the continuous devaluation of fiat currency, while the other believes that the large debt of the United States leaves it with no choice but to "print money" to cover the fiscal deficit. A "wrong interest rate cut" may be the key step for these predictions to become reality, at which point capital may flow massively into hard assets like Bitcoin seeking refuge.

However, this script also hides significant risks. As the weakening dollar enables the rise of Bitcoin, the cornerstone of the crypto world—stablecoins—are facing erosion. Stablecoins with a market value of over $160 billion have their reserves almost entirely composed of dollar assets. This creates a huge paradox: the macro forces driving up Bitcoin may be undermining the actual value and credibility base of the financial instruments used to trade Bitcoin. If global investors lose confidence in dollar assets, stablecoins will face a severe trust crisis.

Competition in Yield Rates and the Evolution of DeFi

Interest rates are the guiding force of capital flow. When the script of "wrong type of easing" is performed, there will be an unprecedented collision between the yields of traditional finance and DeFi.

The yield on U.S. Treasury bonds is the "risk-free" benchmark for global investors. When it can offer a stable return of 4%-5%, the similar yields in DeFi protocols, which carry higher risks, become less attractive. This opportunity cost pressure directly limits the funds flowing into DeFi.

To address this challenge, the market has seen the emergence of "tokenized U.S. Treasury bonds," attempting to bring the stable returns of traditional finance into blockchain. However, this could be a double-edged sword. These secure Treasury bond assets are increasingly being used as collateral for high-risk derivatives trading. Once a "wrong interest rate cut" occurs, Treasury yields will fall, and the value and appeal of tokenized Treasury bonds will decline, potentially triggering capital outflows and cascading liquidations, transmitting the macro risks of traditional finance to the DeFi system.

At the same time, economic stagnation will weaken the demand for speculative borrowing, which is precisely the source of high yields for many DeFi protocols. Faced with internal and external challenges, DeFi protocols will be forced to accelerate their evolution, transforming from a closed speculative market into a system that can integrate more real-world assets and provide sustainable real returns.

The Differentiation of the Crypto Market

When the macro "noise" drowns everything out, we need to focus more on the "signals" coming from blockchain. Some institutional data shows that regardless of market fluctuations, the core data of developers and users continues to grow steadily. Construction has never stopped. Experienced investors believe that as the regulatory environment improves, the market is entering the "second phase" of a bull market.

However, the script of "error-type easing" may become a sharp knife, splitting the crypto market in two and forcing investors to make a choice: are you investing in macro hedging tools or tech growth stocks?

Under this scenario, Bitcoin's "digital gold" attribute will be magnified infinitely, becoming the preferred choice for capital to hedge against inflation and the depreciation of fiat currency. The situation for numerous altcoins will become precarious. Their valuation logic is similar to that of growth stocks, but in a stagflation environment, growth stocks often perform the worst. Therefore, capital may massively withdraw from altcoins and flow into Bitcoin, causing a significant divergence within the market. Only those protocols with strong fundamentals and real income can survive in this wave of "flight to quality."

Conclusion

The crypto market is caught in a tug-of-war between two huge forces: on one side is the macro impact of "stagflationary easing," and on the other side is the endogenous power driven by technology and applications.

The future development will not be singular. A "wrong interest rate cut" may simultaneously drive up Bitcoin while burying most altcoins. This complex environment is forcing the crypto industry to mature at an unprecedented speed, and the true value of protocols will be tested in a harsh economic climate.

For each participant, understanding the logic of different scenarios and grasping the complex relationship between macro and micro will be key to navigating future cycles. This is not just a bet on technology; it is a grand game of choosing which future to believe in at critical junctures of the global economy.