The broader outlook for perceived store-of-value assets such as bitcoin $BTC$65,221.50 and gold remains constructive. The reason is simple: the U.S. government is more indebted than ever, with no end in sight.
The Treasury’s Debt to the Penny dataset put the federal debt at an all-time high of $39.7 trillion on Friday. According to some observers, the government’s debt is growing by roughly $7 billion each day. If that were market capitalization, the accumulation alone would rank as the 16th-largest cryptocurrency, well ahead of privacy coins like XMR and other tokens.
According to the founders of the crypto newsletter service LondonCryptoClub, the pace of growth supports the so-called debasement trade, a bet that fiat currency will fall in value. The trade involves buying limited-supply assets like gold and bitcoin that benefit from the devaluation, which often occurs when governments face high debt.
“This is the world of fiscal dominance and ultimately will dictate Fed policy. Rates will necessarily need to be kept artificially low and liquidity will need to be provided to help fund the refinancing cycle,” the founders told CoinDesk. “The ‘debasement’ trade was a popular narrative last year but has gone quiet. Yet it’s set to go into overdrive!,” the founders told CoinDesk.
Several observers have raised the alarm over the ballooning debt in recent months.
Apollo chief economist Torsten Slok warned that the U.S. debt-to-GDP ratio of over 120% means there is little room to spend more money should a recession arrive. Moreover, the Fed can’t cut interest rates as aggressively as during previous recessions because that would add to inflation and, more importantly, reduce the yield on bonds. The government needs to issue more bonds to fund deficits and those need to offer a high return to draw demand.
“The U.S. has never entered a recession with this little fiscal buffer,” he wrote in a blog post in May.
All this means that if a recession occurs, the pain could be longer-lasting and may trigger demand for assets that fall largely outside of the financial system, such as $BTC and cryptocurrencies. That said, since its inception in 2010, $BTC has moved largely like a tech stock and not a haven investment.