DeFi Could Thrive If US Interest Rates Are Cut, Say Analysts

Analysts at Bernstein believe that DeFi could thrive if the Federal Reserve lowers US interest rates. The international liquidity and the differences in rates might play a significant role for the cryptocurrency market.

These forecasts stand in contrast to growing worries that such rate reductions might negatively impact investments in Bitcoin and Ethereum.

Rate Cuts Might Spell Trouble

With the US economy seemingly stuck in a cycle of inflation and rising living costs, there is increasing pressure to lower Fed interest rates. Three Democratic Senators have requested “aggressive” action, as reported by Bloomberg, referencing rumors from Capitol Hill indicating that upcoming rate cuts might be moderate.

In their communication, Senators Elizabeth Warren, Sheldon Whitehouse, and John Hickenlooper advocated for a 75-point reduction to “alleviate potential threats to the job market.” While the specifics of the cuts are debated among various groups, it is very likely that some version will be approved.

Nevertheless, within the crypto sector, these suggested cuts are seen as contentious. Surveys from Bitfinex state that Bitcoin’s price might rebound swiftly following rate reductions, yet the data indicates a bearish trend over time thereafter.

While lowered interest rates encourage fresh investments in US markets, they also signal a broader sense of fragility. Bitcoin is viewed as a risky asset, meaning rate cuts could lead to unforeseen repercussions. Overall, investment levels may rise, but the inclination towards riskier assets may decrease.

Moreover, September is typically a tough month for the stock market, regardless of these potential cuts. This presents additional challenges for the crypto markets.

Read more: How To Get Paid in Bitcoin (BTC): Everything You Need To Know

Bernstein’s Narrative

On the other hand, a report from Bernstein analysts has a more optimistic outlook. Analysts Gautam Chhugani, Mahika Sapra, and Sanskar Chindalia indicated that the DeFi sector is well-placed to seize new opportunities.

Specifically, global traders can enhance liquidity in decentralized markets for USD-backed stablecoins, allowing DeFi to capitalize on US-specific market dynamics and accrue benefits from the dollar’s performance.

This perspective resonates with some of Arthur Hayes’ comments from August 2024 regarding rate reductions. He notably highlighted the interest rate differentials between the US and other currencies, such as the yen, suggesting that global traders can tap into these variances via DeFi to uncover new profit possibilities.

“With a rate cut likely around the corner, DeFi yields look appealing again. This could serve as the trigger to rejuvenate crypto credit markets and rekindle interest in DeFi and Ethereum,” asserted analysts at Bernstein.

Read more: Top 11 DeFi Protocols To Keep an Eye on in 2024

These forecasts have prompted Bernstein to incorporate the Ethereum-based liquidity protocol Aave into its portfolio, replacing two derivative protocols, GMX and Synthetix.

This move indicates two trends that Bernstein anticipates. Firstly, lending markets and international liquidity may become crucial for sustained growth. Secondly, despite recent underperformance, they are placing their bets on Ethereum and platforms built upon its blockchain.

At this juncture, numerous factors remain uncertain. If interest rate cuts occur, they could range between 25 and 75 points. Nevertheless, Bernstein’s bold predictions could foster renewed optimism within the sector.