Crypto lending rates now match Treasuries
Much of crypto grew when the Federal Reserve held interest rates at or near zero, which made borrowing and using leverage cheap. Rates now sit far from zero. The SOFR rate and Treasury rates out to one year all fall between about 3.6% and 4%.
In crypto, you can borrow and lend on platforms like Aave, or invest in rate products called vaults on platforms like Steakhouse and Gauntlet. These are plain supply-and-demand markets. Strong demand to borrow pushes rates up; heavy supply of money to lend pushes rates down. They run separate from any central bank policy.
Normally you would expect decentralized crypto rates to pay more than Treasuries, since they carry more risk. Right now they are almost identical. That match is a sign of low energy in the market. Anyone can watch it by checking rates on Aave and the vault platforms directly on their websites. There is so much money parked in stablecoins that lenders will take almost any yield, and there is little demand for leverage.
What a rate move would signal
When demand for leverage starts to rise, that will be one of the most positive signals that crypto prices are about to climb. Picture a surprise Fed rate cut - not on the table, and no one expects Chair Powell to cut. If it happened, asset prices would rise, crypto traders would grab leverage to lean into the momentum, and DeFi rates would climb as borrowing demand grew. So fiat rates would fall while DeFi rates rose.
Over the past year the reverse happened: fiat rates went up, DeFi rates went down, and now they are equal. The gap between US dollar rates and USDC rates on DeFi platforms is a strong gauge of the market's potential energy.
A feeble, low-energy market
The weak market ties directly to this year's poor price action. June saw $4 billion of outflows from crypto ETFs, and outflows ran all through Q2. Up until one weekend there looked to be a faint pulse of energy, but fresh geopolitical warnings came back and tamped things down, much as they did with equities. Other things watched include perpetual funding rates and momentum signals.
Institutions move into vaults
JP Morgan announced it will become a vault curator. A vault takes a batch of fixed income - tokenized Treasuries, tokenized money market funds, or DeFi rates held as tokens - puts it in a portfolio, wraps that portfolio into another token, and issues it. You get the benefit of fixed income portfolio management with a token you can keep on chain.
This area is expanding fast this year. There is roughly $15 billion of on-chain tokenized fixed income products, and vaults are the on-chain way for portfolio managers to use them. JP Morgan stepping in is notable.
The form is untested. GSR is studying it closely and weighing whether to curate vaults itself. The open question is what sits inside. So far the holdings stay close to safe: a couple of private credit funds, but most is money markets or short-term Treasuries. The bigger question is where demand comes from - who will be just as happy getting their fixed income yield in a vault token instead of an ETF. Many will likely want to post tokenized Treasury and money market products as collateral on futures exchanges.
Tokenized equities point the same way. Securitized tokenized equities came onto the New York Stock Exchange last week through Superstate and Ondo. There is a sense these will become standard and see high demand, so a lot of product is being built now. Where the demand fills in remains to be seen.
A brutal Q2 and what could shift it
Q2 was brutal on price. One odd detail: small cap crypto actually beat Bitcoin and Ether. In a broad rally, like the same period last year, wide participation across blockchain and growth names is a good sign. In a sagging market, it means Bitcoin and Ether - the quality assets - got punished harder than the small caps. The CoinDesk 80 index fell only 7.5% in Q2, while Bitcoin dropped 14% and Ether dropped 26%.
Crypto marches in quarters. There is seasonality, and about a quarter's worth of attention span. A little energy appeared as Q2 ended and July began. For any lasting shift, interest rate policy needs to move, the geopolitical situation needs some resolution, and regulatory clarity needs to pass in robust form - though hope for that clarity is thinning. Those would help in the short term. For Bitcoin to move, it eventually has to build its own momentum.
