Bitcoin Gains Traction as U.S. Debt Crisis Deepens

As the U.S. sovereign debt crisis continues to unfold, market attention has sharply increased on Bitcoin as a new type of global reserve asset, potentially heralding a historic opportunity for the digital currency.

The U.S. debt and credit crisis can be understood by examining the experiences of Italy and Japan. Since Trump's presidency, U.S. debt has been on a downward spiral. The 10-year U.S. Treasury yield approached its annual high during the second quarter, a period marked by GDP contraction, a CPI hovering just above 2%, and the Truflation index remaining below 2% for two consecutive months. This situation is the result of two dynamic factors: trade tariff uncertainty and fiscal deficit expansion, which have led to persistent inflationary pressures and elevated interest rates. The recent tax cuts and the U.S.'s fiscal deficit status have contributed to this uncertainty. Additionally, some countries have reduced their holdings of U.S. Treasuries due to political factors, including trade wars. The recent lukewarm response to the 20/30-year Treasury auction on May 21 is a clear indication of this crisis, which is fundamentally a credit crisis. Despite Trump's criticism of Biden's large deficits during full employment, the market is waking up to the reality that the U.S. has no intention of addressing its debt problem. Meanwhile, Trump's trade policies are alienating major buyers of U.S. Treasuries.

To anticipate the future of U.S. debt, one can look at developed countries already mired in debt crises. Italy, for instance, has been grappling with the highest debt-to-GDP ratio globally since the 2010s. During the pandemic, Italy effectively defaulted in the public market, with the European Central Bank acting as the sole net buyer of Italian debt, playing the role of the lender of last resort. Similarly, Japan, with the highest debt-to-GDP ratio among developed economies, has been issuing debt to combat population decline and stagnant productivity. The Bank of Japan now holds more than half of its assets in government bonds, also acting as the lender of last resort.

The U.S. is currently at a stage where it allows its debt to spiral out of control, maintaining permanent deficits regardless of economic conditions. In other words, the "supply" of U.S. debt (new issuance) will increase in the long term. Meanwhile, global demand for U.S. Treasuries is declining, at least partly due to Trump's trade policies, which have alienated historical buyers like Japan and China. This supply-demand imbalance will force the U.S. to follow the European and Japanese model of self-purchasing debt: the U.S. Treasury will continue to expand its bond purchases, following the plan initiated by former Treasury Secretary Yellen; the Federal Reserve will launch a bond-buying program, acting as the lender of last resort, similar to Draghi's pledge to do "whatever it takes" to ensure system stability; and zero-interest-rate policies (ZIRP) may return as long as inflation is controlled. In short, the U.S. will embark on permanent monetary expansion to avoid worsening its debt crisis.

Those familiar with Bitcoin's history know that its price is highly correlated with the global rate of monetary expansion. The more liquidity injected into the global system, the more Bitcoin benefits. The fundamental logic is that Bitcoin possesses all the ideal qualities of a reserve asset—durability, divisibility, fungibility, portability, verifiability, and absolute scarcity. Like gold, which has served humanity for 5,000 years and whose price has surged with the expansion of the money supply, Bitcoin's price is expected to follow a similar trajectory. Currently, major global economies have implicitly accepted the need for unlimited monetary expansion: China and Europe have already initiated quantitative easing (QE) policies, and the U.S. is expected to follow suit soon. In this context, even with gold's stable position, the global reserve asset system has enough room to accommodate new members. Although Bitcoin is a high-risk investment, it represents the best non-symmetric opportunity in the current market during an era of monetary expansion.

Additionally, analyzing the long-term deficits of Japan and Italy provides insights into how the U.S. situation could benefit Bitcoin. The long-term deficits in Japan and Italy have led to currency depreciation, stagnant real wage growth, and sluggish productivity and GDP growth. While the U.S. has a more favorable population outlook and a more resilient and innovative economy, the trend of currency depreciation leading to a decline in real wages is likely to continue, if not accelerate. This trend provides a new rationale for holding scarce assets like Bitcoin.

Despite Bitcoin's recent all-time high, it remains a high-risk, non-symmetric investment. However, if Bitcoin ultimately becomes a global reserve asset, the current non-symmetric opportunity will disappear. There are numerous bearish arguments against Bitcoin, including the potential disruption from quantum computing and the concentration of the Bitcoin blockchain as mining becomes less profitable. While these threats are overstated, investors should be fully informed.

Traditionally, U.S. Treasuries have been viewed as a global "safe haven" asset due to the U.S.'s status as a global leader in market economics, democracy, and the rule of law. High demand for U.S. Treasuries is also a result of the U.S.'s large trade deficits (net exporting countries need to reinvest their dollars, often choosing U.S. Treasuries). However, Trump's first 100 days in office revealed the structural issues of high deficits and debt in the U.S., which will never be resolved. The U.S. will be forced to issue more debt permanently. Trump's problematic trade policies have also reduced demand for U.S. Treasuries. Ultimately, the U.S. will need to start buying its own debt, with the Federal Reserve acting as the lender of last resort, similar to the Bank of Japan and the European Central Bank in Japan and Italy.

In this crisis, the return of Bitcoin and other assets to pre-Trump levels, or even new highs, seems counterintuitive but is actually logical—markets are digesting the return of currency depreciation. Currently, the U.S., China, Japan, and Europe are all implementing or about to implement monetary expansion policies. Historically, liquidity surges have driven up the prices of scarce assets. Gold has already risen, and Bitcoin is expected to follow. While there are uncertainties surrounding Bitcoin becoming a global reserve asset, it is undoubtedly the best non-symmetric investment choice in the current macro environment.