Podcast Notes | Conversation with GSR Asset Management Head: To Determine if This Crypto Rally is Real, Just Watch the Lending Rates on Aave

Organized & Compiled: Deep Tide TechFlow

Guest: Andy Baehr, Managing Director of Asset Management at GSR

Host: Steve Erlic, Head of Research at Sharplink

Podcast Source: Bits & Bips (Interview program under Unchained)

Original Title: Is This Crypto Rally Real? GSR's Andy Baehr Maps the Signals to Watch

Release Date: July 17, 2026

Conflict of Interest Statement: GSR is a leading global crypto market maker, whose revenue relies on market trading volume and volatility; its asset management division recently launched the Core3 ETF (BESO) holding BTC/ETH/SOL. The guest discusses the overall market trend and does not involve recommendations for specific assets.

Key Takeaways

Andy Baehr previously headed product and research at CoinDesk Indices and held leadership roles in derivatives departments at Credit Suisse, BNP Paribas, Morgan Stanley, and Deutsche Bank. He now manages the asset management business at GSR, one of the world's largest crypto market makers. His framework for measuring market conditions is simple: the market slides along a spectrum, with "ambivalence" at one end and "conviction" (a firm uptrend) at the other. The current market is stuck at the "ambivalence" end, and every rally is like a single-stage booster rocket that burns out after the first stage. He pointed out three signals to track: DeFi lending rates, the unexpected passage of the CLARITY Act, and the formation of a consensus on the Fed's "hawkish peak." The most direct judgment is: to see if the rally triggered by last week's lower CPI can be sustained, just watch the USDC borrowing rate on Aave. It's currently around 3.75%, similar to U.S. Treasury yields. This number says everything about what low energy looks like.

Highlights Summary

What is the "Fed Solstice"

• "Since 2022, we haven't truly seen a hawkish peak. Back then, the Fed aggressively raised rates to absorb post-pandemic fiscal stimulus, making things tough for crypto assets and stocks because we didn't know how far the rate hikes would go."
• "Imagine there's a 'Fed Solstice'—the moment we collectively feel, 'Okay, we know where the rate hikes will end.' Before that, it's hard to believe any rally can last."
• "Once we cross that peak and see the landscape on the other side of the hill, market sentiment can change very quickly."

The Three Layers of Market Energy

• "Roughly two-thirds to three-fourths of the entire crypto market is derivatives trading, with only one-fourth to one-third being spot. Derivatives are too important in determining price direction."
• "Last year's perfect rally had three stages: The first step was an ETH short squeeze; the second step was crypto-native traders pouring into spot and perpetual contracts as the trend formed; the third step was ETF funds starting net inflows, with ETH ETF inflows even surpassing BTC in May-June."
• "If a rally doesn't have new layers of buying joining one after another, it's just a single-stage booster rocket. It burns out and falls back down."

Watch DeFi Rates, More Useful Than Charts

• "After last November's presidential election, lending rates on Aave spiked to over 20%. Now? They're hovering around the risk-free rate, 3.75% to 4.1%."
• "There's no credit spread, meaning no one is willing to pay a premium to borrow for leverage. This is the most direct evidence of low energy."
• "Imagine one morning Warsh drinks an extra strong coffee and decides to cut rates. Asset prices will rise, Bitcoin will rise, and then people will rush to Aave to borrow. Because it's a pool priced by supply and demand, DeFi rates would instantly spike. That's when you'd know the market has real energy."

DAT Treasury Companies Temporarily Absent

• "Strategy just sold nearly $500 million in stock via an ATM offering and didn't buy a single bitcoin with it. They kept the money to pay preferred stock dividends."
• "DATs should be buyers joining in the middle stage of a rally because the transmission of shareholder sentiment takes time. But ETF funds aren't long-term capital, as the past eight weeks have proven."

CLARITY Act: From 75% to Less Than 40%

• "The longer something drags on, the lower the probability of it ultimately being completed. Now we need almost zero disruption and a strong tailwind to finish in just three weeks."
• "The probability on Polymarket has linearly dropped from 75% in May to less than 40% now. Every extra day it doesn't pass is a wasted day."
• "The ethics clause issue, in my view, is a 'delicious political morsel' that some Democrats want to take home. The disclosure of the presidential family profiting over $10 billion in digital assets adds fuel to the fire."
• "But if it does pass, the market will treat it as a surprise. Surprise is one of the most potent emotions driving price movement up or down. It's hard to imagine the market not having a bump-up rally after it passes."

The Rally's Authenticity: Don't Just Stare at CPI

Steve Erlic: June CPI came in at 3.5% year-on-year, and core CPI was flat month-on-month for the first time in five years. This is the most direct trigger for this rally. But many reasons for the CPI drop look one-off and may not repeat next month. Kevin Warsh said during Congressional testimony that 'inflation is a choice,' hinting he could maintain a hawkish stance. What's your take on the nature of this rally?

Andy Baehr: We've been using the term "ambivalence" to mark the market state for most of Q2 and even the end of Q1. Ambivalence doesn't mean the market doesn't care what it's doing. The market will have what look like decent impulse rallies; you might even see a bit of energy return in the perpetuals market, and then the rally quickly dissipates, liquidations happen, and it's back to square one.

Bitcoin rallied from around the $79,000 highs around the spring Consensus conference, broke above $80,000, and then got hammered all the way down to around $61,000, near the production cost line. That process actually brought some energy back to the market, but we're still in this ambivalent phase.

The opposite of ambivalence is conviction, where you can reliably count on the rally to sustain and truly form a different momentum cycle. The key question is: Is this just another single-stage booster rocket, or is it finally starting to grow legs?

Zooming out, we're in an environment where we don't know where the "hawkish peak" is. The last similar period was before 2022 when the Fed hiked aggressively to absorb post-pandemic fiscal stimulus, making things tough for crypto assets and stocks. Why? Because we didn't know where the hawkish top was.

Imagine a "Fed Solstice." That's the moment we collectively feel comfortable, knowing where the rate hikes will end. We have a new Fed Chair people aren't very familiar with yet, and he's clearly not someone who soothes the markets. Before the collective perception truly reaches that node, it's hard to believe any rally can reliably sustain.

Steve Erlic: What's your take on Warsh as Fed Chair? He doesn't want to give forward guidance or publish dot plots. He wants the Fed to be reactive to data. But at the same time, he has a President who wants low rates.

Andy Baehr: This is clearly not a market-soothing Fed Chair. He declared independence in bold letters in his inaugural statement, signaling he won't try to placate the market or over-communicate. This is a new kind of relationship for the world and a Fed Chair.

His situation isn't simple either. Energy prices have calmed down now, but geopolitics could make them spike again in a very short time. People are largely uncertain about what will happen, just pricing expectations into rate futures. Whether it's early or late, and by how much, rate cuts will come, but we don't know the endpoint.

For crypto, this ultimately boils down to two variables: inflation expectations and nominal rate expectations. In 2022, nominal rates accelerated up, directly outpacing inflation expectations, making it very tough for Bitcoin because expected real rates were rising. When expected real rates become better understood, that will form a more favorable macro backdrop for Bitcoin. More practically, it will also give people a clearer sense of the cost of fiat financing, thereby providing more leverage to the crypto system. And the crypto market desperately needs leverage to restore the volatility and trading energy that have been declining since last October.

Stocks are Going Crazy, Crypto Left Behind

Steve Erlic: The Mag 7 continue to struggle, but AI stocks are soaring. We're seeing rotation into cyclical small-cap stocks like the Russell 2000. What does this imply for risk sentiment? How does it affect your view on crypto?

Andy Baehr: This makes me think of crypto's performance in Q2. Q2 was awful, but small-cap crypto tokens actually outperformed BTC, ETH, and SOL relatively. Even XRP rallied, quite astonishing.

I worked on the CoinDesk 80 index at CoinDesk, which covers mid- to small-cap tokens ranked 21 to 100. In any healthy or even neutral market conditions, you should see large caps outperform small caps because collective market attention focuses on those more liquid, bigger names; that's a reliable indicator of a normal market. What we saw in Q2 was the reverse: small coins fell less than big coins. This suggests funds were withdrawing from the main assets—ETFs, perpetuals market, spot market, DAT treasury companies. This might have been a kind of capitulation signal towards the end of Q2.

As for the stock market rotation, traders are chasing where the action is. Crypto lacks energy partly because other sectors have more exciting stuff—SpaceX IPO, Anthropic, OpenAI—money flowing out of crypto ETFs to grab those opportunities.

Steve Erlic: So from the trading desk perspective, how is smart money positioning now? Who will be the structural buyers? ETF funds aren't permanent capital, the past eight weeks have proven that. Stablecoin supply has shrunk by about $10 billion since May, the largest contraction since Terra/Luna collapsed. DAT treasury companies aren't in the buyer camp either. Strategy just sold nearly $500 million via ATM and didn't buy any BTC, keeping it for preferred stock dividends. Metaplanet is similar.

Andy Baehr: We are bullish on DATs; they truly can help complete the digital asset market puzzle: a treasury focused on a single digital asset plus the native skill to manage that asset. Your company and other well-run DATs offer stock investors an interesting way to get exposure to digital assets with additional features.

But what role did DATs play in last year's perfect rally? They weren't the first to enter. The textbook progression of last year's rally was: Step one, an ETH short squeeze, where a concentrated hedge fund position long BTC/short ETH started unwinding. Step two, crypto-native traders seeing the trend form, rushing into spot and perpetuals. Step three, ETF funds starting to reverse to net inflows in May-June 2025, with ETH ETF inflows even surpassing BTC at the time, which was shocking. Then the passage of the GENIUS Act added fuel to ETH because so many stablecoins rely on the Ethereum network.

DATs should be buyers joining in the middle stage of the rally after that; shareholder sentiment takes time to transmit, stock price increases create more momentum for token purchases. They are structural, more permanent holders, not as short-sighted as ETF holders.

A Most Direct Signal: Watch DeFi Lending Rates

Steve Erlic: Are you seeing any specific signals changing? Like put/call ratios, DeFi rates picking up?

Andy Baehr: I spent a lot of time looking at Aave rates when I was at CoinDesk; we published a daily rate based on Aave. In the month after the presidential election last November, those rates spiked to over 20%. Now? They're right around the risk-free rate, from SOFR to one-year Treasury yield, roughly 3.75% to 4.1%. DeFi has no credit spread over the money market, meaning no one is in a rush to borrow to lever up.

The most interesting part is imagining a scenario: One morning Warsh drinks an extra strong coffee, feels good, and announces an unexpected rate cut. Asset prices will rise, Bitcoin will rise. Then people will rush onto Aave to borrow. Because it's a supply-and-demand priced pool, rates on Aave, every Vault on Morpho, Gauntlet, Stakehouse, Beta, Concrete—all lending pool rates would instantly spike. People would be eager to add leverage.

Leverage is what really pushes prices higher. High enough to potentially trigger ETF inflows, potentially trigger DAT accumulation, potentially trigger long-term holders entering. But before that, if you see DeFi rates lingering around the risk-free rate, that's low energy.

This is a very easy signal to monitor. These rate models are simple linear functions of supply and demand: the more supply, the lower the rate; the less demand, the lower the rate. When a huge amount of supply floods these platforms saying 'give me any yield,' naturally the rates are at their lowest.

DeFi's Fixed Income Market is Quietly Taking Shape

Steve Erlic: You briefly mentioned the new fixed-income products and Vaults on-chain. How are traders using these now? How should ordinary investors use DeFi rates to gauge market energy?

Andy Baehr: Think about how most people interact with crypto assets. Buying/selling tokens, trading perpetuals or options—these are asset-based, feeling more like stocks or commodities in the traditional world. These models aren't great for creating a fixed income market, a money market, or building a parallel yield curve to the traditional world.

DeFi is bit by bit creating fixed-income solutions. No central bank, just supply and demand. DeFi's money markets don't need large institutions influencing the next day's SOFR rate via overnight repos; it's people buying and selling instantaneously. Now these activities are forming clusters, allowing us to see roughly where stablecoin lending rates should be.

Vaults are a great wrapper. Managers identify various lending pools, put them into a portfolio, and that portfolio issues a token representing ownership or yield rights. Essentially, it's a money market fund. Of course, it's not a fund, not a security, mostly unregulated. But it's 24/7, widely accessible globally. As long as people do their homework and know what they're participating in, it's a very efficient product.

From our asset manager perspective, the Vault manager role carries a kind of fiduciary-like responsibility: needing to be accountable for outcomes, disclosing to Vault holders. That's how my CFA principles and values see it, regardless of legal requirements. Money market funds are securities; this growth process will inevitably involve some reckoning about what standards managers should maintain.

CLARITY Act: The Forgotten Catalyst

Steve Erlic: As we speak, a meeting is happening at the White House. The President, Chief of Staff Susie Wilds, a few Republican senators involved in negotiations, and Kristen Smith from the Blockchain Association—they're trying to finalize an agreement on the ethics clause. This is key to winning Democratic support. A new version of the Senate bill could come out anytime. If it passes before the August 7th deadline, would this be a strong shot in the arm for the market?

Andy Baehr: In the long run, passing legislation is crucial. When you think about how much time this industry or related industries might have wasted to get to this point, it's painful. But the longer something drags on, the lower the probability of it ultimately being completed.

The probability on Polymarket has dropped from 75% in May to less than 40% now, almost linearly. Every day it's not done is a wasted day. The ethics clause issue, personally, I find it hard not to see it as a 'delicious political morsel' some want to take home to enjoy later. The disclosure of the presidential family profiting over $10 billion in digital assets is a ready-made target for Democrats.

But I do think if it passes, the market will treat it as a surprise. It's not a 'saw it coming, no big deal' thing. Surprise is one of the most potent emotions driving price movement up or down. It's hard to imagine the market not having a bump-up rally after it passes.