Cryptocurrencies are facing a new threat: the lure of Treasuries offering a similar payout for a whole lot less risk.
In a rare reversal, crypto yields that institutions typically seek out have fallen below what the US government pays to borrow for three months, giving the hedge funds and family offices that have flocked to the digital space one less reason to keep investing.
The Federal Reserve’s hawkish stance is driving up interest rates almost everywhere -- except in the speculative world of crypto, where yields have collapsed alongside volumes, wiping out some of the main avenues for generating double-digit returns, while the implosion of the Terra stablecoin project and the failures of crypto lenders like Celsius Network shook confidence.
“Two years ago, interest rates in crypto were at least 10% and in the real world rates were either negative or near-zero,” said Jaime Baeza, chief executive officer of ANB Investments, a hedge fund focused on digital assets. “Now it’s almost the reverse, because yields in crypto have collapsed and central banks are raising rates.”
This year’s crypto winter has already challenged some of proponents’ key arguments, such as the asset class being a hedge against inflation and political turmoil. Instead, Bitcoin has traded pretty much in line with stock benchmarks like the S&P 500, except that it’s dropped at a much faster pace.
But not until recently have crypto yields been matched, or even surpassed, by those of government debt that’s essentially risk free.
Unlike in traditional markets, falling yields don’t signal lower risks for crypto. Yields are shaped by trading volumes rather than risk sentiment, and reflect the rate an investor can hope to earn lending out holdings on exchanges and decentralized-finance protocols, or depositing them with crypto lenders, often in the form of stablecoins.
Because they have no direct relation to central bank rates, crypto yields can slump even as borrowing costs spike across financial markets to reflect steep Fed hikes. That’s creating a mismatch that could lead to a secular stagnation in some of the world’s most speculative assets, some market observers say. Lower yields will make it less likely that investors buy tokens to lend them out, leading to lower demand and in turn, lower prices.
That dynamic is becoming even more pronounced after Fed Chair Jerome Powell’s recent higher-for-longer rates pledge to subdue stubborn inflation.
“Higher appetite for Treasuries has sucked out liquidity from crypto,” said Sidney Powell, the chief executive of crypto lending company Maple Finance.