In July 2023, the Federal Reserve pushed the federal funds rate to the range of 5.25%-5.50% and kept it at this high level for the following year, marking the beginning of the "high interest rate era" in the narrative of global assets. As we entered the first half of 2024, the market was briefly convinced that this was just a short pause before the climax: inflation seemed to be retreating, the European Central Bank symbolically lowered rates once in June, and traders began to bet on “a quick rate cut followed by a continuous decline” on the yield curve. The real turning point came on July 24 – on the same day, a report from Morgan Stanley and the public remarks of European Central Bank Governing Council member Coeure acted like two synchronized hammers, striking the expectations for global interest rates. The report assessed that the Fed would remain on hold at the July meeting and might maintain rates unchanged for the rest of the year, emphasizing that decision-makers were losing patience with the inflation above target; the money market immediately priced in the likelihood of close to two rate hikes before the end of the year. On the same day, Coeure, who had just taken a “first rate cut” step in June, explicitly stated that the September meeting would only discuss rate hikes or maintaining rates, ruling out evidence supporting further rate cuts, and referred to the impact of Middle Eastern conflicts on energy costs and inflation expectations as a "crucial" policy variable. This transatlantic “hawkish resonance” between the Fed and the European Central Bank revised the initially imagined upcoming easing cycle into a prolonged period of high interest rates: the risk-free return was broadly elevated, the cost-effectiveness of holding cash and interest-bearing assets strengthened, and risk assets like BTC and ETH, which yield no income and have very long durations, appeared even more "expensive" under rising discount rates. As a result, off-market dollar funds became cautious in the face of higher costs, and the extended high interest rate environment weakened the risk appetite for crypto assets and their capability for new off-market inflows.
The Fed Holds Steady: Expectations of Two Rate Hikes Loom
On July 24, 2024, Morgan Stanley's script starkly contrasted with the previously optimistic thought of “easing is near.” The strategists assessed that the Fed would remain on hold in the July meeting and likely keep rates unchanged for the remainder of the year, while also warning, "The Fed is losing patience with inflation that is above target, and the inflation trend in the coming months is crucial." The subtext of this statement is to move “rate cuts” from the baseline scenario to the tail risk and bring “one more hike if necessary” back into the spotlight. Meanwhile, the actual pricing in the money market had already moved ahead: against the backdrop of the federal funds rate remaining locked at 5.25%-5.50% since July 2023, contract prices began to digest the path of “close to two rate hikes before the end of the year,” completely wiping out the previous optimistic bets of multiple rate cuts in 2024 with a series of higher implied rates.
The repricing of the yield curve directly raised U.S. real interest rates and the cost of dollar financing: the returns from holding dollar cash and interest-bearing assets were more attractive, while any long-term assets that do not generate cash flow were revalued under the new discount rate. For BTC and ETH, this change was not an abstract concept – in an environment of high interest rates and a strong dollar, their weight as non-yielding chips in global asset allocations was naturally compressed; the cost of leveraging off-market dollar funds rose, and the inflow of dollar-denominated funds on-chain leaned more towards short-cycle strategies and high liquidity scenarios. Capital willing to lock in on volatile head crypto assets that do not provide interest returns would become scarcer with each “hawkish turn” in interest rate expectations.
The ECB's Hawkish Tone Resurfaces: Middle East Conflict Raises Inflation
Having just made the first rate cut of this cycle in June, the European Central Bank was briefly categorized in the market as entering the "easing path." But just a month later, Governor Coeure publicly stated in July that the September meeting would choose between rate hikes or maintaining rates, clearly ruling out the possibility of further rate cuts, and emphasized that there was insufficient evidence of a second-round inflation effect to support continued easing. This was a signal to reverse direction: what was originally seen as the end of the tightening cycle was dragged back into a “normal high interest rate” environment by rising energy prices and stubborn service sector prices fueled by the Middle East conflict, thus elongating the path of inflation decline, making it more uncertain.
Coeure particularly pointed out that the duration and evolution of the Middle East conflict "clearly are crucial for monetary policy," as global energy prices rose again under the background of geopolitical risks, forcing the ECB, like the Fed, to maintain rates at a higher level to counter the resurgence of inflation expectations. For euro-denominated assets, this meant that the risk-free return was raised again, and the cost-effectiveness of holding cash and interest-bearing assets increased; for euro-denominated funds entering the crypto market, it represented a recalibration of risk appetite and entry timing – more funds chose to first lock in domestic currency interest before engaging in arbitrage and liquidity strategies with shorter durations and immediate exit options, leaving long-duration, non-interest-yielding assets like BTC and ETH to a few that were genuinely willing to bear valuation discounts and policy uncertainties.
Global Rate Repricing and On-Chain Confrontation
When Morgan Stanley on July 24, 2024, predicted that the Fed was likely to maintain high interest rates for the year, while the money market had already digested a path close to two rate hikes before the end of the year, it was almost simultaneously that ECB Governing Council member Coeure locked the options for the September meeting in "rate hike or hold steady." Both central banks released hawkish signals at the same time, directly pressing the pause button on the previous imagination surrounding "multiple rate cuts" and the elongation of the easing cycle: the global yield curve was repriced upwards as a whole, the risk-free return was elevated, and the interest rate expectations for the dollar and euro turned hawkish in sync, leading to a new round of position adjustments in the foreign exchange market around a strong dollar and a higher euro interest rate spread. The slowing decline in inflation combined with rising energy prices made this round of repricing no longer a short-term noise but like a "re-calibrated interest rate floor" pressing down on the valuations of all risk assets.
In terms of capital flows, this resonance between interest rates and exchange rates first shifted the "first choice" of cross-border dollar funds back from risk assets to cash and income-generating assets: a strong dollar environment increased the cost of dollar financing, forcing leveraged and carry trades to downgrade, and there were naturally fewer participants willing to chase on-chain volatile returns using high-cost dollars. In the structure of on-chain funds, dollar-denominated tokens and contract assets dominated; their willingness to convert with off-market dollars was directly altered by interest and exchange rates – the higher the interest, the stronger the exchange rate, the more off-market funds tended to first lock in yields on traditional markets and then only direct a portion of funds through short-term, quickly liquidatable arbitrage and yield strategies onto the blockchain. The result was that the risk-return structure of cross-exchange arbitrage, interest carry, and various on-chain yield strategies in the crypto market was rewritten: the interest spread must be significantly higher than the risk-free rates of the US and Europe to attract funds, while exchange rate fluctuations increased hedging costs and margin usage. Under this dual pressure of global interest rates and exchange rates, the dominant narrative in the crypto market shifted from "long-term growth" to "short-term yield and liquidity defense," and the pricing of BTC and ETH began to reflect macro interest rates more than isolated industry cycles.
BTC and ETH Discounts in the High Interest Rate Era
When the Fed and the European Central Bank jointly maintained high interest rates after 2023, the "baseline" of global risk-free returns was elevated, and the discount rate, this abstract parameter in traditional finance, began to directly compress the valuation space of on-chain assets. For BTC, which is seen as "digital gold," high interest rates and a strong dollar means that treasury bonds and cash suddenly become "attractive": investors can achieve considerable real returns with almost no risk, forming a complementary attraction against the zero coupon, high volatility of BTC. ETH and many public chain assets resemble "tech growth" or "platform stocks," where much of the cash flow in the story is substantial in the long term; with a high duration characteristic, when interest rate expectations turn hawkish and the discount rate rises, the present value of these future returns is systematically discounted, valuation multiples contract correspondingly, and the market cap imagination built on a low interest rate environment is forced to adjust downward.
This chain of interest shocks has a more intuitive representation in the derivatives market: each time interest rate expectations turn hawkish, the funding rate of crypto perpetual contracts will retreat from long-term positive values toward zero or even negative values. High-leverage bulls are no longer willing to pay ongoing costs for "future price appreciation," while bears demand higher subsidies to bear directional risk. In the options market, implied volatility often increases before and after monetary policy meetings, and the premiums for out-of-the-money put options expand, as investors pay higher insurance premiums to hedge against macro surprises, widening the overall risk premium. Under this pricing logic, funds began to withdraw from high narrative, long-duration tracks and turn towards on-chain interest rate markets, re-staking, and various structured products that provide clear yields; only those agreements that can provide actual returns comparable to the high interest rate environments in the US and Europe on-chain are likely to reclaim some risk budget in the high discount rate era for BTC and ETH.
The Central Bank Game Is Not Over: The Next Steps for Crypto Trading
From July 2023 when the Fed raised the federal funds rate to 5.25%-5.50% and maintained it until mid-2024, to July 2024 when Morgan Stanley reported that the Fed would likely maintain high interest rates for the year while the money market had digested close to two rate hike expectations, and coupled with the ECB turning to more hawkish guidance supported by energy and service prices after its first rate cut in June, Coeure directly locked the September options in "rate hike or hold steady" and emphasized that the Middle Eastern conflict is "crucial" for inflation expectations, global central banks collectively leaning hawkish under inflationary stickiness and geopolitical risk pressures, the high interest rate environment was extended. The Fed and ECB jointly pushed for the repricing of the interest rate curve and raised risk-free returns, causing ongoing liquidity and valuation squeezes for the crypto market reliant on dollar-denominated funds and off-market dollar financing. In this macro framework, what truly governed the discount rates of BTC and ETH was not a single narrative on-chain, but rather every round of inflation data’s "surprises," the surge in energy prices driven by the Middle East situation, and the subtle changes in the rhetoric of the Fed and European Central Bank, as they would quickly rewrite the probability distribution for rate hikes and cuts before the end of the year, altering global capital costs and risk appetite. In the medium term, the outcome of this round of central bank games is: macro factors overwrite industry news, with funds paying more attention to interest rates, exchange rates, and cross-asset correlations, while high interest rates and a strong dollar increase the attractiveness of holding cash and income-generating assets, forcing BTC and ETH, as long-duration risk assets, to accept higher risk premiums under high discount rates. Only those trading structures that can genuinely anchor on-chain gains in relation to global interest and foreign exchange rates are likely to win meaningful risk budgets and pricing power for crypto assets amid future macro fluctuations.
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