With Fed Rate Cuts Imminent, Here's Which Crypto Sector Could Benefit The Most, According To Bernstein

Potential Federal Reserve rate cuts could rekindle the crypto credit markets and renew interest in DeFi and Ethereum ETH/USD, Bernstein analysts predict.

What Happened: Bernstein analysts Gautam Chhugani, Mahika Sapra and Sanskar Chindalia noted that DeFi, which allows global users to earn a yield on stablecoins like USDC/USD and USDT/USD by providing liquidity on decentralized lending markets, could see a revival due to the potential rate cuts.

Despite a decline from the DeFi boom of 2020, stablecoin lending yield on Aave AAVE/USD — Ethereum's ETH/USD largest lending market — still ranges between 3.7% to 3.9%. The analysts predict that a dovish rate cycle and a new crypto cycle could reawaken crypto lending markets, as reported by TheBlock.

The indicator of a recovering crypto DeFi market is seen in the doubling of the total value locked (TVL) in DeFi. From its 2022 low, the TVL increased to $77 billion, and a three to four times increase in monthly DeFi users since the lows. Stablecoins are also back at highs of around $178 billion, and monthly active wallets remain stable at around 30 million.

While Ether has struggled relative to Bitcoin BTC/USD, analysts suggest that strengthening DeFi lending markets on Ethereum could attract large whales and institutional investors back to the crypto credit markets. This could provide a catalyst to stem Ether's underperformance relative to Bitcoin.

Also Read: ‘What Changed?’ — Federal Reserve May Take A Bigger 50 Basis Points Rate Cut Bite Next Week, Market Odds Imply

Why It Matters: The potential resurgence of DeFi yields could have significant implications for the crypto market. This could lead to a boost in digital asset prices and potentially attract large investors back to the crypto credit markets.

According to the analysts, if the credit appetite of crypto traders increases, stablecoin DeFi yields could rise above 5%, surpassing those offered by U.S. dollar money market funds. This could further stimulate crypto credit markets and boost digital asset prices.

As a result of this trend, Bernstein has added the Aave token to its digital assets portfolio, replacing derivative protocols GMX and Synthetix. The Aave token has risen 23% over the last 30 days, despite flat to down Bitcoin prices

What’s Next: The influence of Bitcoin as an institutional asset class is expected to be thoroughly explored at Benzinga’s upcoming Future of Digital Assets event on Nov. 19.

Read Next: 

• Bitcoin Could Tumble 15-20% If Fed Cuts Interest Rates As Expected: Analysts Lay Out The Bear Thesis

Image created using artificial intelligence with Midjourney.