Bitcoin and gold shot higher this week, with both getting a boost from some frantic action surrounding the bond market, and the cryptocurrency also benefiting from activity in Washington.
Bitcoin had dropped from a January high of around US$95,000 to below US$60,000 at the end of June. Investors shied away from speculative assets earlier in the year and crypto supporters were concerned about the lack of movement on proposed regulation of the industry. On Friday, bitcoin rose above US$77,000.
Gold hit a high above US$5,300 in January but dropped to around US$4,000 in June as rising rates made interest-bearing investments more attractive. Gold rose to US$4,661 on Friday.
The first jolt arrived on Wednesday when the Treasury Department announced plans to significantly increase its buyback of long-term Treasuries, or government debt. On the same day, President Donald Trump, who made about US$1.2 billion last year from various crypto holdings, urged Congress to move quickly on crypto legislation.
There was an almost immediate reaction, which included a dollar sell-off and a jump in the value of gold and bitcoin as investors moved towards alternative assets.
How these two investments caught fire can be understood in the context of several developments this week.
The Treasury Stepped Into The Bond Market
In a surprise announcement on Wednesday, the US Treasury Department said that it would at least double the size of its planned purchases of longer-term government debt. The manoeuvre was intended to calm bond markets after a sustained sell-off, meaning investors were asking for higher yields to lend money to the US, which investors suddenly viewed as riskier.
That’s because while the Treasury intervention worked, at least for a short period, it also raised questions about whether the government is trying to push borrowing costs lower despite inflationary pressures. Treasury Secretary Scott Bessent is attempting to lower long-term borrowing costs, a move that can put upward pressure on inflation at a time when inflation is already elevated. Bessent’s manoeuvre could handcuff the Federal Reserve, which fights inflation by raising interest rates.
Debt, Inflation, And ‘Debasement Trade’
Then there’s the national debt, which surpassed a record US$40 trillion on the same day that the Treasury’s actions unfolded. The milestone figure was recorded just five months after the US hit a record US$39-trillion debt in March. It reached US$38 trillion five months before that, in October.
There is already a lot of anxiety over inflation, particularly because of the conflict in Iran and soaring energy prices. If yields on US bonds are not truly reflecting risk, you can often see that play out in the value of the US currency, which took a significant downward swoop on Wednesday.
So where does the money that was invested in the dollar or Treasuries go? This week, it appears to have been funnelled into what is known as the ‘debasement trade’, when investors flood into alternative assets such as gold, which rose more than 2 per cent on Wednesday. The debasement trade now includes bitcoin. Bitcoin jumped more than 20 per cent this week.
Crypto Had Very Good Week
On Wednesday, President Donald Trump, who banked nearly US$1.2 billion from his crypto businesses last year, held a crypto currency conference at the White House where he called on Congress to pass the crypto-friendly Clarity Act, saying that it would “keep us ahead of China, keep us ahead of everyone else”.
Trump then yielded the floor to Commodity Futures Trading Commission (CFTC) Chair Mike Selig, who vowed to “use every tool available” to advance Trump’s agenda.
Selig’s comments came ahead of a CFTC meeting on Thursday to examine ways the agency can use its existing authority to ease crypto rules. A day earlier, other regulators proposed rules making it easier for crypto companies and projects to raise money from the public.
Since taking office, Trump has pushed policies friendly to the crypto industry and reversed a Biden administration regulatory crackdown.
Bitcoin’s Big Squeeze Sent Prices Even Higher
Bitcoin can sometimes get a bump when the US dollar is on the ropes as investors try to unload the US currency. But you don’t typically see the kind of related movement that was observed with bitcoin this week.
The price of bitcoin had been stuck between US$62,000 and US$67,000 for weeks. Investors seized on that weakness, many placing bets that the cryptocurrency would be stuck in that range for some time to come.
However, on the day the Treasury announced its buybacks, Treasury yields fell, as did the dollar, and bitcoin blasted through that upper level of US$67,000.
The Treasury’s actions negatively affected the money investors could make on US bonds and the dollar, and boosted the value of bitcoin. That meant that many investors who had shorted bitcoin, or bet that its price would remain subdued, were forced to close their positions as bitcoin surged. Closing those bearish positions required buying back the digital asset, adding even more upward pressure to bitcoin’s price.
By Friday, more than US$4 billion in bearish crypto positions had been liquidated during the rally, according to CoinGlass, which tracks cryptocurrency derivatives markets.
AP
