U.S. Government Debt Overtakes Crypto Yields In Current Macro

Amid the current macro conditions and fall of the crypto market, yields in digital assets have tanked under that offered by the safest U.S. government debt. The fall of the crypto hedge funds and lending players has also created a negative sentiment toward crypto lending putting pressure on yields.

The Fed’s monetary tightening measures amid soaring inflation include raising interest rates everywhere. Thus, in speculative markets like crypto, the yields have collapsed along with volumes. Thus, the lucrative double-digit crypto yields are to be seen nowhere today.

Jaime Baeza, chief executive officer of ANB Investments, a crypto-focused hedge fund notes:

“Two years ago, interest rates in crypto were at least 10% and in the real world rates were either negative or near-zero. Now it’s almost the reverse, because yields in crypto have collapsed and central banks are raising rates.”

Also, cryptocurrencies are still far from proving their mettle as a hedge against inflation and market volatility. Rather, they have been forming closer correlations to the volatile equity markets.

Note that cryptocurrencies behave differently from traditional markets where falling yields don’t signal lower risks for crypto. In crypto, yields are shaped by trading volumes instead of risk sentiment. Lower yields mean it is less likely that investors will buy more tokens to lend.

This could play a cascading effect leading to lower demand and lower price. Sidney Powell, the chief executive of crypto lending company Maple Finance said: “Higher appetite for Treasuries has sucked out liquidity from crypto”.

DeFi TVL Collapses

The total value locked (TVL) in decentralized finance (DeFi) is a key measure of interest in yield-generating digital assets. From its peak of $182 billion in December 2021, the TVL of the entire DeFi space has dropped to $60 billion now.

Courtesy: Bloomberg

Andrew Sheets, chief cross-asset strategist at Morgan Stanley said: “Now the environment is very different. A key cross-asset theme has been the shift from a near zero and negative rate environment to one where you can get over 3% on a triple A-rated T-bill that’s guaranteed by the US government. This will have an impact on the performance of assets with no yield such as gold, some tech stocks and crypto.”

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