Crypto Prices Plunge 1.67% as Moody's Downgrades U.S. Credit Rating

Cryptocurrency prices experienced a notable decline on Monday, mirroring a broader risk-off sentiment that swept through financial markets. Bitcoin (BTC) dropped to $102,870 after trading near the $106,000 level on Sunday. Ethereum (ETH) also saw a decrease, falling to $2,400. The total market capitalization of all cryptocurrencies decreased by 1.67% to $3.25 trillion.

The selling pressure in the crypto market was reflective of the broader financial market trends, with futures tied to major indices such as the Nasdaq 100, Russell 2000, and S&P 500 all down by over 1%. Dow Jones futures slipped by 0.70%. This market reaction was largely driven by Moody’s decision to downgrade the U.S. credit rating, which raised concerns about the country’s fiscal outlook.

Moody’s warning about the deteriorating fiscal outlook of the U.S. came as the national debt has surged to over $36.8 trillion, up from $21 trillion in 2020. This figure is expected to rise further following a new agreement in the House on the so-called Big, Beautiful Bill, which includes tax cuts estimated to cost between $4.5 trillion and $5 trillion over the next decade. These tax cuts are partially offset by projected spending cuts of $1.5 trillion to $2 trillion.

Historically, markets have reacted negatively to credit rating downgrades of major economies. For instance, stocks and cryptocurrencies declined on August 1, 2023, when Fitch downgraded the U.S. from AAA to AA+. A similar move occurred on August 5–6, 2011, when S&P Global made the same downgrade. Some analysts, however, downplayed the impact of Moody’s decision, with Jim Bianco calling the downgrade a “nothingburger.”

In theory, the deteriorating U.S. public finances could be a bullish catalyst for Bitcoin, an asset that is slowly becoming a safe-haven asset. BlackRock argued in a white-paper that Bitcoin was becoming a good asset to hedge against the soaring U.S. debt and the rising risk of a default. BlackRock noted that Bitcoin was a “scarce, non-sovereign, decentralized asset with a limited supply.”

Since the release of that paper, Bitcoin’s fundamentals have improved. Supply on exchanges and in over-the-counter markets has dropped to multi-year lows, while demand via exchange-traded funds has surged. Cumulative inflows into spot Bitcoin funds have surpassed $41 billion. More companies are also adding Bitcoin to their treasuries. Therefore, Bitcoin and crypto prices will likely bounce back from this panic. For example, most altcoins have rallied in the past few weeks as the Liberation Day tariffs fears eased.

The crypto market experienced a significant downturn today, primarily triggered by Moody's decision to downgrade the U.S. sovereign credit rating from "Aaa" to "Aa1." This move has raised concerns about the sustainability of America's growing $36 trillion debt, which has had a ripple effect across various financial markets, including cryptocurrencies. The downgrade has dampened the rally mood, as U.S. Treasuries are no longer seen as a symbolic "safe haven asset." This shift in perception has led to a risk-off sentiment, causing investors to move away from riskier assets, including cryptocurrencies.

The sudden downgrade by Moody's has also reinforced growing worries over the U.S. sovereign bond market. As Capitol Hill debates further unfunded tax cuts, the downgrade risks exacerbating concerns about the U.S. sovereign debt. This has sparked further concerns about the spread of “Sell America” sentiment, which has been triggered by the developing trade war. The crypto market, which is highly sensitive to global economic conditions, has not been immune to these developments. Major cryptocurrencies such as Ethereum, Dogecoin, and XRP have all seen declines of around 3%, reflecting the broader risk-off sentiment in the market.

The downgrade has also had an impact on other safe-haven assets. Gold, for instance, has seen increased demand as investors seek to protect their portfolios from the heightened uncertainty. The decision by Moody's to downgrade the U.S. sovereign credit rating has triggered a selloff in U.S. equities, further contributing to the risk-off sentiment in the market. The last time the long end of the yield curve reached 5% was during the so-called "tariff tantrum," which also triggered sharp sell-offs in both crypto and equity markets. This historical context adds to the concerns about the potential impact of the current downgrade on the broader financial markets.

In summary, the crypto market's downturn today is a direct result of Moody's decision to downgrade the U.S. sovereign credit rating. The downgrade has raised concerns about the sustainability of America's debt, dampened the rally mood, and reinforced worries over the U.S. sovereign bond market. As a result, investors have moved away from riskier assets, including cryptocurrencies, leading to a risk-off sentiment in the market. The impact of the downgrade is not limited to the crypto market, as it has also affected other safe-haven assets and contributed to a selloff in U.S. equities. The broader financial markets are likely to remain volatile in the coming days as investors continue to assess the implications of the downgrade.