The debasement trade is back — and will benefit bitcoin.
That’s according to asset manager Grayscale’s crypto research team, who wrote in a note this week that the U.S. government debasing its currency would lead to cash hitting digital assets.
“Unchecked government debt growth undermines the credibility of fiat currencies and drives investors to seek out alternative stores of value like physical gold and certain cryptocurrencies,” the note by the firm’s head of research, Zach Pandl, read, adding that primarily bitcoin would benefit.
The so-called debasement trade is when investors buy an asset as a way to hedge against a currency losing value. The trade was hot last year, and helped bitcoin’s run, but the digital asset’s run lost steam after October as traders turned their attention to stocks related to artificial intelligence.
But since last week, bitcoin has benefited from news that the U.S. Treasury would at least double the size of its liquidity-support buyback operations. The announcement last week hurt the dollar but non-yielding assets have benefited.
“That buybacks are needed at all is the problem: heavy growth in government debt is driving up the cost of borrowing,” the note continued. “The Treasury is treating the symptoms (rising bond yields) because they cannot cure the disease (structural deficits).”
The note added that on the same day last week as the buyback announcement, the Treasury also said the U.S. public debt exceeded $40 trillion for the first time.
As debt and interest payments grow, the government needs to either raise taxes, cut spending, or issue more debt.
Bitcoiners see the more politically likely path as expanding the dollar supply — which is ultimately bad for the dollar, and good for scarce assets like bitcoin.
After bitcoin started surging last week, the dollar had its worst week of August and was trading at a three-month low.
Bitcoin was trading for $77,493 on Friday afternoon in New York after hitting a high this week of $81,281. Over a 24-hour period, the coin now sits unmoved, but over a 30-day period, it has jumped by more than 20%.
