Module 10: Stablecoins and Macro
Central Banks and Interest Rates
Chapter 2 of 12 · about 6 minutes
2.1 The most important price in the world
"If you had to watch only one number in the global economy, what would it be?" Hash asked.
Mint guessed. "Bitcoin's price?"
"The interest rate set by the US central bank," said Hash. "It influences the cost of mortgages, business loans, government debt, and the return on safe savings around the world. And through all of that, it influences what investors are willing to pay for risky assets, including crypto."
2.2 What central banks do
A central bank manages a country's money supply and interest rates. Examples include the US Federal Reserve (often called the Fed), the European Central Bank, the Bank of England, the Bank of Japan, and the Reserve Bank of India.
Most central banks aim for stable prices, usually defined as low and steady inflation, around 2% a year in many developed economies, along with healthy employment and financial stability.
Their main tool is the policy interest rate: the rate at which banks lend to each other overnight, or borrow from the central bank. Changes in this rate ripple out to every other interest rate in the economy.
| Central bank action | Typical goal | Effect on the economy |
|---|---|---|
| Raise rates ("tightening" or "hawkish") | Fight high inflation | Borrowing becomes expensive; spending and investment slow |
| Cut rates ("easing" or "dovish") | Support a weak economy | Borrowing becomes cheaper; spending and investment rise |
2.3 Why the Fed matters globally
The US dollar is the world's main reserve currency (Chapter 5). Much global trade, debt, and savings are in dollars, and dollar stablecoins dominate crypto. So the Fed's decisions affect markets everywhere, not just in the United States.
The Fed's interest rate committee meets roughly eight times a year. Its decisions, and the statements and projections around them, are among the most closely watched events in global markets, including crypto.
2.4 How rates affect asset prices
Higher interest rates tend to lower the prices of risky assets, for three main reasons.
1. Opportunity cost. When safe assets like government bonds pay 5%, investors need a stronger reason to hold risky assets. When safe assets pay nearly 0%, investors reach for riskier options to earn anything.
2. Discount rates. As Module 5, Chapter 8 explained, future cash flows are discounted to today's value. Higher interest rates raise discount rates, lowering what future value is worth today.
3. Cost of leverage. Higher rates make borrowing more expensive, reducing leveraged buying of all assets, including crypto.
A simple example. Consider an asset expected to pay $10 million a year forever. Its value is roughly the payment divided by the required return.
| Required return | Value |
|---|---|
| 8% | $10 million ÷ 0.08 = $125 million |
| 10% | $10 million ÷ 0.10 = $100 million |
A 2-percentage-point rise in required returns, driven by higher interest rates, cuts the value by 20%, with no change in the asset's cash flows.
"So assets can fall even if nothing about them changes," said Mint.
"Exactly," said Hash. "And assets whose value depends mostly on the distant future, like growth stocks and many crypto assets, tend to be the most sensitive."
Chapter 2 · How rates reach risk assets
A rise in the policy rate transmits to risky assets through three channels: opportunity cost, as safer bond yields become more attractive; a higher discount rate, which lowers the present value of future cash flows; and a higher cost of leverage, which reduces borrowed buying.
2.5 Opportunity cost in crypto
Interest rates affect crypto directly through stablecoin yields.
| Environment | Safe government bond yield | Typical DeFi stablecoin lending rate | Where capital tends to flow |
|---|---|---|---|
| Near-zero rates (2020 to 2021) | ~0% | Several percent | Into DeFi, seeking yield |
| Higher rates (2023) | ~5% | Often lower than government bonds | Out of DeFi toward safe yields, or into tokenised bond products |
When safe yields rose above DeFi stablecoin yields in 2023, it became harder for DeFi to attract stablecoin capital. This also helped drive growth in tokenised government bond products (Module 9, Chapter 7).
2.6 The 2022 to 2024 rate cycle
| Period | Fed policy (approximate) |
|---|---|
| 2020 to early 2022 | Rates near zero, plus large asset purchases (Chapter 4) |
| March 2022 to July 2023 | Rapid hikes, reaching about 5.25% to 5.5% |
| Mid-2023 to mid-2024 | Rates held at that level |
| From September 2024 | Rate cuts began |
| Through late 2025 | Cuts continued; by the end of quantitative tightening on 1 December 2025, the target range was about 3.75% to 4% (Chapter 4) |
Crypto's bull market of 2020 to 2021 happened during near-zero rates. The 2022 crash came during rapid hikes. Many traders link the following recovery partly to expectations that rates had peaked and would eventually fall. Correlation isn't proof of causation, and crypto-specific factors also mattered, but the pattern is widely noted.
Check current rates and the latest decisions on central bank websites, since they change over time.
2.7 Expectations matter more than decisions
Markets are forward-looking. By the time a central bank changes rates, markets have usually already priced in the expected decision, based on statements, economic data, and futures markets that reflect expectations.
So prices tend to react to surprises: a larger or smaller change than expected, or a change in the expected future path.
| Expectation | Actual decision | Typical market reaction |
|---|---|---|
| Cut of 0.25% | Cut of 0.25% | Little reaction to the decision itself |
| Cut of 0.25% | No cut | Risk assets often fall |
| Cut of 0.25% | Cut of 0.5% | Risk assets often rise, unless it signals economic trouble |
Traders also watch the central bank's guidance about future decisions, often more closely than the decision itself.
2.8 Real interest rates
The real interest rate is the nominal rate minus inflation.
Real rate ≈ nominal rate − inflation
| Nominal rate | Inflation | Real rate |
|---|---|---|
| 5% | 3% | +2% |
| 2% | 6% | −4% |
When real rates are negative, holding cash or bonds loses purchasing power, which tends to push investors toward other assets, including gold and crypto. When real rates are strongly positive, safe assets become more attractive. Many analysts consider real rates one of the most important macro drivers for gold and Bitcoin.
2.9 Try it yourself
Find the current policy interest rate of the US Federal Reserve and your own country's central bank. Find the date of the next decision for each. Then look at a market-implied probability tool for the Fed's next decision, which many financial sites publish. What does the market expect, and how did Bitcoin react to the last decision?
Key takeaways from this chapter
- Central banks set policy interest rates to manage inflation, employment, and financial stability.
- The US Federal Reserve's decisions affect markets worldwide, including crypto.
- Higher rates lower risky asset prices through opportunity cost, discount rates, and costlier leverage.
- Rising safe yields can pull capital out of DeFi stablecoin strategies.
- Crypto's 2020 to 2021 rally coincided with near-zero rates; the 2022 crash with rapid hikes.
- Markets react to surprises and guidance more than to expected decisions.
- Real rates, nominal rates minus inflation, are a key driver for gold and Bitcoin.