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Falling interest rates: what consequences for the crypto sector?

Falling interest rates: what consequences for the crypto sector?

For just over a year, the crypto ecosystem has been organising itself to cope with rising rates. While centralised stablecoins have benefited greatly, decentralised finance (DeFi) is eagerly awaiting a return to a more accommodating monetary policy.

A 180-degree turnaround. After a year 2023 marked by a brutal rise in rates, it would appear that the world's main central banks have decided to change their tune. And with good reason: after exceeding 10%, inflation has fallen sharply in Europe and the United States. As a result, the Fed and the European Central Bank have hinted that they may cut rates again.

This decision will obviously not be without consequences for the crypto industry, which is particularly sensitive to the price of money. As cryptos are considered risky assets, the higher the rates, the less attractive they are, and vice versa.

"If rates fall again, the crypto sector could become attractive again," thus points out Sébastien Dérivaux, CEO of Stakehouse Financial, a firm that supports decentralised autonomous organisations.

The question remains as to which side the rise will manifest itself. On the side of bitcoin? Ether? Of all altcoins?

👉 A surge in bitcoin and ether would benefit decentralised finance

"The last few bull cycles have shown that the trigger was a surge in the price of bitcoin followed by a near-general rise in the entire sector," explains Jean-Marie Mognetti, CEO of asset manager CoinShares.

In addition to a drop in rates expected in 2024, the halving of bitcoin as well as the prospect of the first approval of a Spot ETF are all elements identified by analysts as being able to make a significant increase in the price of the sector's leading crypto-currency favourable.

Also according to some analysts, this influx of capital could in turn benefit decentralised finance. "The effect would be twofold. On the one hand, the fall in rates would allow investors to borrow at a lower rate and benefit from a leverage effect on bitcoin. On the other hand, the rise in the price of this benchmark crypto would encourage players to put it up as collateral to borrow stablecoin or other cryptos to generate leverage," analyses Sébastien Dérivaux.

"It will also be interesting to see whether this time, the next wave of speculators will seek to use DeFi platforms more than centralised platforms such as Celsius Network or Genesis, which have clearly shown their management limits by going bankrupt," continues the Frenchman.

At the height of the Bull Market in October 2021, lending and borrowing protocols such as Aave and Compound had a total value of $19 billion and $12 billion respectively, with commission income of up to almost $2 million a day.

Today, these amounts have fallen to $6 billion and $2.4 billion. Rates becoming attractive again for liquidity providers would provide borrowers with cash to generate leverage.

👉 What consequences for stablecoins?

"The first beneficiaries of this rise in rates have been centralised stablecoins such as USDC or Tether, which have seen their revenues increase since the majority of their reserves are made up of US Treasury Bills," explains Garrett Jones, co-founder and chief economist at Bluechip, a site specialising in stablecoin ratings.

But with rates falling, how will they organise themselves? "The latter have an advantage since they do not redistribute part of the return to their users, which surely allows them to anticipate a fall in rates," notes Sébastien Dérivaux.

In the first quarter of 2023, Circle reported revenues of $779 million and more than $1 billion in liquidity on its balance sheet, according to the latest tally, which dates from June 2023.

For its part, Tether claimed quarterly profits close to $1 billion in 2023. A credible figure given its exposure to US Treasuries, which was around 85% of its total stablecoin reserves.

"Overall, 2023 was a record year for centralised stablecoins, which shouldn't find themselves in too much trouble as rates are unlikely to fall below 2% in 2024," warns Garrett Jones.

On the other hand, could Dai stablecoin issuer Maker find itself shaken up? The latter made a dramatic shift in 2023 significantly increasing its exposure to Real World Assets (RWAs) and US Treasuries in order to, among other things, offset the loss associated with the decline in fee income generated by Dai borrowers.

Today, more than 50% of Maker's income comes from US Treasuries. "The adjustments made allow us to anticipate a fall in rates, which would probably be offset by renewed interest in decentralised finance and therefore activity on the Maker protocol", Sébastien Dérivaux is confident.

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