Could Fitch’s Downgrade of US Credit Ratings Spur Bitcoin Bullish?

On August 1, a significant event took place in the financial world: the authoritative credit rating agency Fitch downgraded the US government’s credit rating from intact AAA to AA+. This downgrade indicates less confidence in the US government’s ability to effectively manage its fiscal obligations.

The downgrade caused investors to take a cautious stance, prompting many to withdraw their money from assets such as stocks, silver, oil and long-term bonds.. Instead, they have turned to cash and short-term instruments, which are perceived as safer options in volatile times.

S&P 500 futures (blue), WTI oil futures (blue), 20-year US bonds (yellow), silver (orange). Source: Trading View

As you can see from the chart above, Fitch’s reaction to Fitch’s decision to downgrade the US government’s credit rating was widespread and affected commodities, fixed income and equities.. This has implications for various financial institutions and investment portfolios, including Bitcoin (BTC).

Traders are now wondering if Bitcoin’s digital scarcity and resistance to censorship could provide a safe haven from the widespread “flight to safety” movement fueled by the credit downgrade of the world’s largest economy.

The downgrade had little effect on the markets

A Moody’s Analytics report for May pointed to a possible domino effect, in which a downgrade of US Treasury debt could trigger further downgrades in the financial sector. In particular, only Fitch and S&P have assigned US debt an AA+ rating, while Moody’s keeps it at AAA with a stable outlook.

Curious, The cost of insuring US sovereign debt against default, as evidenced by credit default swaps (CDS), remained largely stable after the downgrade, which is surprising in light of such important news.

Cost of credit default swaps on 5-year US Treasuries. Source: World Government Bonds.

This financial instrument protects against the risk of default on debt, acting similarly to an insurance policy whereby investors pay a premium to be compensated if the issuer of the debt (in this case, the US government) defaults.

This stability indicates that investors were not intimidated by the immediate impact of the downgrade.. One possible reason is that US Treasuries are considered one of the safest investments in the world because they are backed by the US government. The issuer guarantees the repayment of the debt within the specified period, including interest.

5-year US Treasury yield, 12-hour chart. Fountain: trade view

Note that the recent daily fluctuations in yields seem to be less significant given that 5-year government bond yields have risen steadily for two weeks. This may be due to undermining investor confidence in US debt management, fueling demand for higher yields.

In addition to the dynamics of Treasury yields, a fall in the DXY index, which measures the value of the US dollar against other currencies, could create problems.. If this leads to a weakening of faith in traditional assets, investors may turn to alternative stores of value, potentially increasing the attractiveness of Bitcoin.

Dollar strength index (DXY). Source: Trading View

Over the past two weeks, the DXY dollar index rose from 99.50 to 102.60, indicating a possible change in investor sentiment. They may be moving away from treasury bonds, stocks and commodities to cash, highlighting the dollar’s appeal in the face of uncertainty.

Bitcoin price forecast in the short term is negative

The strength of US Treasury default swaps and the strength of the dollar, according to the DXY index, suggest that investors may increase their cash holdings in anticipation of market turmoil.

Hence, Bitcoin may not immediately benefit from a US government downgrade. The initial flight to liquidity often overlooks the benefits of decentralized assets during early market turmoil.

Given Bitcoin’s digital scarcity and its fixed supply, it stands out as a valuable asset amid mounting public debt that could devalue cash. As a result, investors may increasingly view Bitcoin as a safe-haven and reliable asset class that is resistant to censorship due to its decentralized nature.

This article is for general informational purposes and is not intended and should not be taken as legal or investment advice. The views, thoughts and opinions expressed here are solely those of the author and do not necessarily reflect or represent the views and opinions of Cointelegraph.

Investments in crypto assets are not regulated. They may not be suitable for retail investors and the entire amount invested may be lost. The services or products offered are not intended or available to investors in Spain.

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About Ankur Jain

I'm Ankur Jain, and I'm thrilled to be part of the team as an editor. I call India my home, and I have a passion for crafting engaging and well-written articles. With a solid background of 7 years in this field, I bring a wealth of experience to my work. It's my pleasure to contribute to the informative and captivating content you'll find on Stay tuned for some exciting stories and news pieces coming your way!

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