On Aug. 1, a significant event occurred within the financial world: Fitch, a reputable credit ratings agency, lowered the credit rating of the United States government from the pristine AAA to AA+. This downgrade signaled diminished confidence in the U.S. government’s ability to handle its fiscal responsibilities effectively.
The downgrade nudged investors into a cautious stance, leading many to move their money out of assets like stocks, silver, oil and long-term bonds. Instead, they favored cash and short-term instruments, which are perceived as safer options in uncertain times.
S&P 500 futures (blue), WTI oil futures (cyan), U.S. 20-year notes (yellow), silver (orange). Source: TradingView
As evident from the above chart, the reaction to Fitch’s decision to downgrade the U.S. government’s credit rating was broad-based, affecting commodities, fixed income and equities alike. This has implications for various financial institutions and investment portfolios, including Bitcoin (BTC).
Traders are now contemplating if Bitcoin’s digital scarcity and censorship resistance can offer refuge from the widespread “flight to safety” movement instigated by the deteriorating credit score of the world’s largest economy.
The downgrade had little impact on markets
A Moody’s Analytics report from May hinted at a potential domino effect, where a downgrade of U.S. Treasury debt could lead to further downgrades in the financial sector. Notably, only Fitch and S&P have marked U.S. debt as AA+, while Moody’s still holds it at AAA with a stable outlook.
Interestingly, the cost of insuring U.S. sovereign debt against default, as indicated by credit default swaps, has largely remained stable post-downgrade, a surprising development in the face of such significant news.
U.S. 5-year Treasuries credit default swaps value. Source: World Government Bonds
This financial instrument protects against the risk of default on debt, working similarly to an insurance policy, where investors pay a premium to receive compensation if the issuer of the debt (in this case, the U.S. government) defaults.
This stability indicated that investors were not panicking about the immediate impact of the downgrade. A potential reason is that U.S. Treasurys are considered one of the safest investments globally because they are backed by the U.S. government. The issuer guarantees that it will repay the debt on the specified maturity date, including interest.
U.S. 5-year Treasury yield, 12-hour chart. Source: TradingView
Note that the recent daily yield fluctuations appear less significant given the five-year government note yield’s consistent rise over the last two weeks. This can be linked to eroding investor confidence in U.S. debt management, prompting demand for higher yields.
Apart from the Treasurys’ yield dynamics, a falling U.S. Dollar Index (DXY) — which gauges the U.S. dollar’s value relative to other currencies — could spell trouble. If it leads to dwindling faith in traditional assets, investors might seek alternative stores of value, potentially boosting Bitcoin’s appeal.
U.S. Dollar Index (DXY). Source: TradingView
In the last two weeks, the DXY has risen from 99.50 to 102.60, implying a potential sentiment shift among investors. They might be moving away from Treasurys, equities and commodities to seek refuge in cash, highlighting the dollar’s appeal during uncertainty.
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The outlook for Bitcoin’s price in the short term is negative
The resilience of credit default swaps for U.S. Treasurys and the strengthening dollar, as per the DXY, suggest that investors might be enhancing cash holdings in anticipation of market turmoil.
Consequently, Bitcoin might not immediately thrive from the U.S. government’s debt profile downgrade. The initial flight to liquidity often overlooks the benefits of decentralized assets during early market turbulence.
Given Bitcoin’s digital scarcity and fixed supply, it stands out as a valuable asset amid expanding government debt, which can depreciate cash. As a result, investors may increasingly consider Bitcoin a safe haven and a robust asset class that is resistant to censorship due to its decentralized nature.
This article is for general information purposes and is not intended to be and should not be taken as legal or investment advice. The views, thoughts, and opinions expressed here are the author’s alone and do not necessarily reflect or represent the views and opinions of Cointelegraph.
