Reevaluation of Crypto Assets Under Long-Term High-Interest Rates: Reconstructing the Allocation Logic of Bitcoin, Stablecoins, and RWA

Beijing time April 30, 2026 early morning, the Federal Reserve Federal Open Market Committee (FOMC) released its latest interest rate decision, announcing with a rare 8:4 vote that the federal funds rate target range remains unchanged at 3.5% to 3.75%. This is the third consecutive hold this year, and another decision in this rate cycle labeled as “within expectations” by the market. The four dissenting votes—from Minneapolis Fed President Kashkari, Cleveland Fed President Harker, Dallas Fed President Logan, and Federal Reserve Board member Milan—set a record for intra-FOMC disagreement since 1992.

However, this “pause” has a fundamentally different tone from previous ones. Shortly after the FOMC decision, data released by the U.S. Bureau of Labor Statistics on May 12 showed that April’s CPI increased by 3.8% year-over-year, hitting a new cyclical high, with core CPI also rising to 2.8% YoY. The inflation data significantly exceeded market expectations, directly breaking the remaining optimism about rate cuts in the market. CME FedWatch tool data shows that the probability of the Fed raising rates before December 2026 has jumped from 14% a week ago to 48%; on Polymarket, the “Fed rate hike in 2026” contract’s trading price is around 34%, roughly tripling compared to a month ago.

This signal indicates that: the market’s focus has quietly shifted from “when to cut rates” to “whether to raise rates.” For the crypto market, this macro narrative reversal is redefining the underlying logic of asset pricing.

Macro Background: Out-of-Control Inflation and the Rate Deadlock

Timeline: From Rate Cut Expectations to Rate Hike Pricing

Reviewing the market consensus from late 2025 to early 2026: institutions generally expect the Fed to cut rates two to three times in 2026, with a marginal easing of liquidity conditions. The median of the FOMC dot plot in March shows one rate cut in 2026 and another in 2027.

However, this mild easing expectation has been repeatedly shattered within just a few months.

Data from the April CPI released on May 12 shows a 3.8% YoY increase, higher than the consensus forecast of 3.7%, and marking a 50 basis point jump from 3.3% in March, creating a new cyclical high for inflation. Energy prices and housing costs are the main drivers. Meanwhile, the U.S. labor market remains strong: non-farm payrolls added 115k jobs in April, far exceeding market expectations of about 55k to 65k, with the unemployment rate steady at 4.3%. This “strong employment, resilient inflation” combination greatly compresses the Fed’s policy maneuvering space.

More notably, fissures within the FOMC are emerging. Three voting members explicitly oppose the dovish “easing bias” language in the policy statement. Their messages are clear and sharp: the next rate move could be either a cut or a hike. Huatai Securities analysts point out that, considering the repeated escalation of oil prices due to Middle East tensions, it’s possible that the dot plot at the June meeting could omit the rate cut guidance.

Is the market overpricing rate hikes?

It’s important to distinguish: the rate hike expectations come from market pricing, not from official Fed guidance. The current FOMC statement does not signal a rate increase, and Powell has not given clear signals at the press conference. However, market behavior itself has formed price signals—the probability of the Fed raising rates before the end of 2026, as assessed by bond traders, has surged from 14% a week ago to 48%. Traders on prediction platforms like Kalshi estimate that the probability of U.S. inflation exceeding 4.5% in 2026 is close to two-thirds, with over 40% chance of exceeding 5%.

This pricing essentially reflects a hedge against inflation stickiness and geopolitical uncertainties. It indicates a reassessment of the Fed’s policy credibility by the market, rather than a direct policy forecast.

Structural Analysis: How High Interest Rates Transmit to Crypto Markets

High interest rate environments impact crypto assets through multiple channels, not unidirectionally, but via structured transmission mechanisms. Grayscale research head Zach Pandl systematically outlines this transmission framework in a recent report, which is worth dissecting.

First Layer: Bitcoin’s Interest Rate Sensitivity—Rising “Holding Costs” for Zero-Yield Assets

Like gold, Bitcoin is a zero-yield asset. When real interest rates rise, the opportunity cost of holding such assets increases because investors forgo the predictable returns from dollar-denominated fixed-income products. Grayscale explicitly states that “long-term high interest rate” policies will exert pressure on “currency devaluation trades,” bringing short-term bearish signals to Bitcoin.

Historical data shows this relationship has statistical significance. As of May 7, 2026, the 10-year TIPS yield was 2.62%, up about 16 basis points from roughly 2.46% at the end of April. When TIPS yields rise rapidly, Bitcoin often faces valuation compression. High rates cause capital to shift away from high-volatility, zero-yield assets toward traditional financial instruments with more certain returns.

Second Layer: Contraction of DeFi and On-Chain Liquidity

The impact of rising rates on decentralized finance (DeFi) is more direct. Yields on fixed-income products in traditional markets have already surpassed most DeFi-native yields, prompting capital to migrate from on-chain lending markets toward fiat rate-driven products.

Data confirms this trend. According to DeFiLlama, as of May 3, 2026, total value locked (TVL) across DeFi chains is about $86 billion, down sharply from the $120 billion high at the start of 2026. Ethereum’s dominance in DeFi TVL has declined from 63.5% in early 2025 to around 53-54% in May 2026. Although on-chain liquidity has not dried up—stablecoin market cap remains high at about $322.7 billion—the “structural shift” of funds is evident.

Third Layer: Stablecoin Issuers and RWA (Real-World Assets) as Structural Beneficiaries

The biggest winners in a high-rate environment are stablecoin issuers like Circle and the RWA sector.

Circle’s business model makes it highly sensitive to interest rates: the company invests USDC reserves in high-quality liquid assets (mainly U.S. short-term Treasuries) and retains all interest income, not distributing yields to USDC holders. Under the current regulatory framework—since the “GENIUS Act” passed and took effect in July 2025, prohibiting stablecoin issuers from paying interest to holders—this regime’s benefits are further amplified.

Circle’s Q1 financial report released on May 11, 2026, shows quarterly total revenue and reserve income of $694 million, up 20% YoY; net income from continuing operations was $55 million, down 15% YoY. USDC circulation reached $77 billion, up 28%; on-chain trading volume hit $21.5 trillion, up 263%. Grayscale estimates that every 25 basis point increase in short-term rates could boost Circle’s revenue by about $190 million.

The RWA sector also benefits. Tokenized U.S. Treasuries, corporate bonds, and other fixed-income products now offer yields significantly higher than on-chain DeFi yields, attracting large capital flows from native crypto applications into compliant, traditional asset allocations on-chain. This is a macro-driven capital shift driven by interest rates.

What Is the Market Arguing About?

Regarding the current high interest rates and crypto market trends, opinions are sharply divided:

Cautiously Bearish: Grayscale and Some Macro Analysts

Grayscale’s core view is that the Fed may not cut rates before September 2027, and “long-term high interest rates” are becoming a policy consensus. Bitcoin will face short-term pressure. But they remain cautiously optimistic about the mid-term outlook for 2026, believing that regulatory developments like the “CLARITY Act” could partially offset macro headwinds.

Rate Hike Expectation: Bond Traders

Pricing based on CME FedWatch shows that the market’s probability of rate hikes before the end of 2026 has surged from near zero to nearly 50%. This expectation is anchored in persistent inflation overshoot and rising energy costs due to geopolitical tensions. If hikes occur, the federal funds rate could rise to 3.75–4.00%.

Liquidity Pessimists: Focused on Balance Sheet Reduction

The Fed’s balance sheet is about $7.284 trillion, with about $78.1 billion shrinking in May alone. At this pace, annual runoff could exceed $1.1 trillion. Plus, new Fed Chair Kevin W. advocates for more aggressive balance sheet reduction—including actively selling the Fed’s $2 trillion MBS holdings—further intensifying liquidity contraction expectations. For risk assets heavily reliant on ample liquidity, this is a significant negative variable.

Structural Optimists: Stablecoins and RWA Participants

Data from Circle and the continued growth of stablecoin market cap suggest that the “liquidity pool” function of on-chain USD is strengthening in a high-rate environment. Stablecoin market cap surpassing $320 billion and USDC’s quarterly on-chain trading volume reaching $21.5 trillion indicate that the infrastructure layer remains resilient despite price volatility.

Industry Impact Analysis: Price, Structure, and Narrative Changes

Price Level

As of May 18, 2026, Bitcoin is at $76,854.8, down 1.37% in 24 hours, roughly 39% below its recent high of about $126,193, and down approximately 22.08% over the past year. The last 30 days saw an 11.76% rebound, but sentiment indicators remain neutral to cautious (data from Gate.io).

Structural Level

High interest rates are reshaping internal capital allocation within crypto markets. Yield-bearing assets (stablecoins, RWA tokens) benefit, while zero-yield assets (like Bitcoin) face pressure. DeFi protocols are experiencing yield competition from traditional financial products. This structural divergence means that the same macro narrative impacts different crypto assets in opposite ways—reducing “internal correlation” in the market.

Narrative Level

One core narrative supporting Bitcoin’s rise is “hedging against currency devaluation”—in the context of global fiat oversupply, Bitcoin’s scarcity as a digital store of value. But high interest rates weaken this narrative: when the dollar itself offers attractive risk-free returns, the appeal of holding zero-yield assets diminishes. This does not negate Bitcoin’s long-term value proposition but indicates that its short-term price is more dependent on macro liquidity than many investors realize.

Conclusion

The April 2026 rate decision, seemingly another “status quo,” is actually a coordinate embedded deep within macro fissures. As expectations of rate cuts are pushed further back, the probability of hikes rises quietly, and internal FOMC disagreements set a 30-year record, the crypto market faces no longer the question of “when will easing come,” but rather the “how long will high rates last” structural challenge.

Gray’s caution is noteworthy not for pessimism but for honesty: it seeks a sober analytical path amid macro facts and market narratives. Short-term pressure on Bitcoin reflects interest rate sensitivity; stablecoin issuers benefit naturally from high rates; capital shifts from DeFi to tokenized fixed income are rational yield-driven moves—these are not positions but structural changes revealed by data.

For crypto participants, the most important thing now may not be predicting direction but understanding structure: which assets are interest rate sensitive, which can survive cycles, and which might even thrive with high rates. After this “last pause,” in the long wait ahead, structure matters more than direction, facts matter more than forecasts.