👀 The Fed cut rates. What's next?

GM everyone. 

It happened.

Yesterday, the Federal Reserve cut interest rates by -0.5%.

This is the first rate cut in 4 years.

It’s the moment we’ve all been waiting for.

I explained it Monday quickly, but here’s why this rate cut is so important:

• When interest rates are high 📈 = investors can find high returns in lower-risk or risk-free assets like US government bonds or cash.

• When interest rates fall 📉 = the return on these safer assets declines 📉 

• As a result, investors are now forced into higher-risk (and higher return) assets like stocks, real estate, and crypto to get the returns they need.

That’s why the post-2008 period of 0% interest rates fueled the greatest rally in risk assets in history (of which BTC was the bigger winner):

In 2022, the Fed started raising interest rates to tackle a big surge in inflation. And it worked—now, inflation is mostly under control.

However, higher rates can negatively affect the job market, as we're seeing now.

So to avoid a 'hard landing' (a sudden economic crash caused by high interest rates), the Fed decided to cut rates again.

Fed Chairman Powell said it himself: 'The US economy is in a good place, and our decision today is designed to keep it there.'

The Fed’s now shooting for a 'soft landing'—reducing inflation without triggering a recession.

No one knows precisely what the future holds, but the Fed expects rates to drop to around 3.5% by 2025.

And so far, the market has reacted well to the news:

• Bitcoin is back above $62,000

• altcoins are popping

• gold soared to an all-time high

• …and stocks are expected to rise at today's market opening.

I believe this is likely to be the end of the 6-month sideways chop we’ve seen in crypto.

With that in mind, here’s a good principle to remember:

The time to take more risks is when altcoins first start to break out - not when everyone is euphoric.

Don’t wait until Bitcoin is in the news all day to increase your risk exposure. Instead, that’s when you’ll start taking profits.

If not, you risk being the guy or gal who buys the exact top out of FOMO.

So far, the sectors breaking out are:

• Select memes (like POPCAT)

• Layer 1s (SUI, TIA, etc.)

• DeFi (AAVE in particular)

Now, I have no idea whether Layer 1s can sustain their breakout to the upside. As I said a few weeks ago, I’m not sure crypto needs another fast and cheap Layer 1 after Solana.

But as interest rates in the traditional world fall, interest rates in DeFi will become increasingly attractive.

When investors can get 5% returns in US government bonds, going through the hassles of DeFi for 7% yield isn’t worth it.

But when bond returns fall to 3% or 2% - it all of a sudden makes more sense.

I expect to see many more Ponzi schemes in DeFi as the cycle takes off and real-world rates fall. So be careful out there. Every protocol you interact with introduces an additional layer of risk.

But I wouldn’t be surprised if DeFi takes off big time again. As a DeFi power user, I’m rooting for the tech to shine again.

I expect markets will be more fun again in the next weeks and months.

So stay tuned.

P.S.: My friend Niklas is organizing a Crypto City Builders program in October on the Caribbean island of Roatan. If you’re into crypto, network states, or tech optimism, this is your tribe. You can find all the details here.

• 🎯 What does an ideal crypto portfolio look like? How do you spot winners? How do you avoid FOMO? How and when should you take profits?

  • Get these answers (and many more) in Enter, Earn & Exit, my 2024 blueprint for investing in crypto. Get $100 off using code ‘2024’.

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DISCLAIMER: None of this is financial advice. This newsletter is strictly educational and is not investment advice or a solicitation to buy or sell any assets or to make any financial decisions. Please be careful and do your own research.