Hedge funds and family offices that have flocked to the digital world now have one less reason to keep investing as the crypto returns that institutions generally seek have dropped below what the US government pays to borrow for three months in a rare reversal.
Interest rates are rising almost everywhere due to the Federal Reserve’s hawkish stance, but not in the speculative world of cryptocurrencies, where yields have fallen along with volumes, eliminating some of the main opportunities for generating double-digit returns, while the failure of crypto lenders like Celsius Network and the implosion of the Terra stablecoin project have eroded confidence.
According to Jaime Baeza, chief executive of ANB Investments, a hedge fund that specialises in digital assets, “two years ago, interest rates in crypto were at least 10% while in the real world rates were either negative or near-zero.” “Now it’s almost the opposite, with central banks hiking rates and crypto yields collapsing.”
The crypto winter of this year has already cast doubt on several of the main claims made by supporters, including the claim that the asset class provides a hedge against inflation and political unrest. Instead, despite falling considerably more quickly, Bitcoin has largely moved in line with market indexes like the S&P 500.But government debt, which is basically risk-free, has yields that match or even surpass those of cryptocurrencies very recently.
Falling yields in the crypto market do not indicate decreased risks, unlike in traditional markets. Yields, which indicate the rate an investor can expect to earn by lending out holdings on exchanges and decentralized-finance protocols, or by depositing them with cryptocurrency lenders, sometimes in the form of stablecoins, are determined by trade volumes rather than risk sentiment.