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Can Bitcoin be a Hedge against a US Treasury Default?

October 6, 2021

With the effects of the COVID-19 pandemic still wreaking havoc on the U.S. economy, concerns of a default have already been raised by U.S. Treasury Secretary Janet Yellen. An abundance of money has been printed in the U.S. in the past two years; 2020 alone saw a monumental jump in the USD M2 money supply.

With debt obligations growing larger and larger, another round of printing may be the only way that a U.S. Treasury default is avoided. Even the mere threat of a default can have hugely detrimental impacts on the economy, motivating investors to transition their money out of equities. The printing of more money is inevitable, as are the problems that will come with it.

Alternative assets are becoming an increasingly attractive hedge against the printing-field U.S. economy and the rising chances of a default. Due to it’s fixed supply schedule, Bitcoin is an extremely enticing hedging option.

Concerns of a National Treasury Default are Rising

Since the beginning of the COVID-19 pandemic in early 2020, the U.S. has been printing record amounts of money to keep the economy alive. By the end of 2020, almost 22% of the U.S. dollars in circulation had been printed that year alone. Rising along with the money supply has been public debt across the U.S., with a massive rise in the public debt-to-GDP ratio leaving America in a constant bleed of money, owing more annually than it can produce.

The rise in debt has led to growing concerns from many key governmental authorities, namely the U.S. Treasury Secretary Janet Yellen. Yellen has recently warned Congress that the country is headed towards a default, and may be “unable to meet its obligations for the first time in our history.” She has called for a raise in the debt ceiling, advising that, if it is not raised, it “would likely cause irreparable damage to the U.S. economy and global financial markets.”

The U.S. dollar has been the world’s most dominant reserve currency for several decades, currently making up nearly 60% of international foreign currency reserves. It became the preferred reserve currency following World War II when the USD was still tied to gold and central banks around the world could sell their U.S. dollar reserves at a fixed rate for gold.

USD remained the most prominent reserve currency even after Nixon ended the Gold Standard in 1971. Since the stability of the global currency reserves is relied upon worldwide for all aspects of the global economy, a default could see the global reserve holdings of the U.S. dollar take a massive hit as another more stable currency takes control. With approximately 40% of the world’s debt being denominated in U.S dollars, the world may never trust the USD as a dominant reserve currency again if the U.S. Treasury incurs a default.

Could Bitcoin Become More Secure than the U.S. Dollar?

The national debt ceiling has been raised over 100 times throughout history, giving the U.S. a break on debt obligations to save the economy from instability. However, each time the ceiling is raised, the debt continues to mount, and inflation grows with it. This seemingly endless lifting of the national debt (and money supply) shows an increase in the relative attractiveness of a currency that has a set minting limit and supply schedule.

Inflation rates have faced their own significant impact as a result of the COVID-19 pandemic. While, in the United States, this rate has looked gradual, taking a look at housing price patterns since the 1960s demonstrates a consistent trend in the increase of such prices. Despite minimum wage and family incomes increasing over the years, the gap between salaries and real estate prices continues to grow wider, meaning some individuals and families will have a harder time catching up. Should a family income of $100,000 increase by 25% to reach $125,000, a home price of $500,000 will increase by the same percentage to reach a whopping $625,000. Looking at the dollar value, American citizens would have to work for a few more years to afford the same house they could have attained the year before.

However, how you store your down payment could work in your favor. Holding USD for your down payment would result in your home-owning dream getting further away from you as inflation rises, while holding your down payment in Bitcoin may actually see the realization of this dream much sooner. Holding it in Bitcoin may not only keep the value of your down payment stable, but it would also provide the promising opportunity of seeing its value increase and catch up to nationally rising housing rates. Consider this scenario: had you invested $50,000 into BTC when it was trading at $5,000, and sold it when it hit a trading price of $50,000, you would have made enough to pay for a $600,000 home without the need to add any funds in addition to your original $50,000 down payment.

Maintained by distributed computers worldwide, Bitcoin does not rely on the strength of any one economy, and its value cannot be tampered with to fulfill any country’s obligations or provide solace to a struggling nation. While that may not be helpful to some groups, it does mean that investments in Bitcoin can keep their value worldwide even if one currency is to see a drastic fall in value.

Should the USD fall from grace, it would likely raise the demand for a hard money asset such as Bitcoin. The unchangeable scarcity and required Proof-of-Work of the Bitcoin system could prove it to be an amazing hedge against the threat of a U.S. Treasury default.

Surveillance Program Preempts Rising Bitcoin Demand

Moreover, the U.S. Government recently announced plans to combat tax evasion through the introduction of a financial surveillance system that aims to keep an eye on almost all non-cash financial transactions. Backed by President Joe Biden, this financial surveillance regime looks to get reports of the inflows and outflows of all financial institutions.

While this system is still in its infancy and will require much approval, the inclusion of crypto exchanges in the surveillance proposal was an interesting development. If anything, this inclusion shows that the government may be anticipating a growing importance and integration of Bitcoin and other crypto currencies, and are preempting it with a surveillance program before mass adoption.

A Bitcoin Investment Could Save the Value of Your Money

A U.S. Treasury default may not happen today or in the near-term future, but as the money supply grows and debt continues to rise, the event becomes more and more likely. Following a default, we could see the value of BTC to USD go parabolic, as money scrambles into hard assets as the government behind the world reserve currency fails to meet its debt obligations.

Bitcoin price has climbed massively since central banks began printing more and more money in response to the COVID-19 crisis, and the bottom of the last BTC cycle even took place in March 2020, which is when governments began taking more serious measures. Owning a Bitcoin miner is one way you can get exposure to further price increases. Since the bottom of March 2020, the vast majority of miners have vastly outperformed those that have simply bought and held their BTC investment.

The progress of Biden’s Infrastructure bill will require more money to be printed in order to support the bill, creating even more inflation. This will mount more debt, further increasing the likelihood of a US Treasury default. The best way to get ahead of this likely outcome is to invest in Bitcoin mining today, before the situation in the U.S. exacerbates. With offerings for individuals and companies of any size, Wattum is your one-stop-shop to get started in mining and hedge against the threat of a default.

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