How Crushing Sovereign Debt Supports Bitcoin Price And Stablecoins

There have been waves of Bitcoin adoption—from individuals to institutions to now some of the largest nation-states in the world. It can be dizzying to keep track of with Bitcoin stuck in a price valley and yet closing to new highs in terms of awareness. One trend that has been quietly brewing has been a crisis of debt issued by nations.

It’s estimated that more than one in three countries is in an acute debt crisis, especially after the post-COVID era. The reasons vary from incompetent leaders to economic crises after the response to COVID-19. The long-term trend of so much state debt creates a strong foundation for Bitcoin and a potential bridge for stablecoins - that might be hard to separate from stagnation around the $58,000 price level and a persistent medium-term correlation with financial speculation.

1- The United States is creating massive amounts of debt - and Tether is sponging it up

The United States Treasury, the debt issued by the US federal government, is the bedrock of the world financial system. Countries choose to save it as a reserve asset. The price of debt worldwide often depends on the rates set within. Books like Paper Soldiers have described how the United States is now weaponizing this dollar dominance and system. However, BRICS countries such as China and Russia are responding to this weaponization and sanctions regime by turning away from American debt, most notably China, which had been one of the world’s largest buyers of Treasuries. Foreign reserves in dollars are around 58% - the lowest on record.

Stablecoins are filling some of the demand as top-down states seek to move away from each other by offering broader US dollar virtual accounts outside of the domestic banking system, including to many Chinese buyers. Tether, the world’s largest stablecoin, mostly buys Treasuries as collateral to maintain a 1:1 reserve for every Tether issued. Their US Treasury custodian, Cantor Fitzgerald, is an American company embedded deeply in world finance as one of 25 primary dealers that can trade directly with the Federal Reserve. In the halls of Congress, the discussion of stablecoins and central bank digital currencies reigns high - and will only continue as stablecoins like Tether start playing a major role in buying up Treasuries in a world where the United States is more indebted than it ever has been. Tether itself has claimed it may become the largest new buyer of treasuries, leapfrogging countries and US allies, such as the United Kingdom.

2- As domestic currencies are debased, inflation grows, and currencies lose value relative to Bitcoin

Over the long run, weaker currencies are already undergoing periods of having large sovereign debt and weak currency demand. The United States is in a position where large fiscal deficits can be sustained because of the foreign demand for US debt, the cornerstone of the world financial system. Other countries aren’t as fortunate. Interest rates on their domestic bonds must go down to sustain paying debt. Any debt they pay that is dollar-denominated involves swapping out domestic currency for the US dollar and creating more money supply - and inflation that comes with it as their currency weakens.

Bitcoin is now playing a role along with stablecoins like Tether for weaker countries that don’t have as many financial services or access to the bedrock US dollar. Some choose to hedge against their domestic currency with Tether and other stablecoins. States like Venezuela, which has high inflation, also see high Bitcoin and stablecoin usage.

3- Eventually, China and the United States look like they’re in short-term difficulties that may require more debt. A seismic flipping moment would be when Treasuries and USD are in trouble, which could be decades in the making

The idea of Ethereum displacing Bitcoin was once a meme. Now that Ether is trading at record lows vs. Bitcoin (not seen since 2021), Tether may be about to flip Ether, showing that demand for stablecoins seems to have caught up with the various applications proposed. Now, the question becomes whether you want digital savings and transactions in a system enmeshed in the old world or the potential new one. With China’s bout with deflation and (relative) economic stagnation and the United States at all-time highs in absolute debt, both governments have structural reasons for why debt may continue growing in the case of the United States and where China’s need to stimulate the economy may lead to a looser money supply and a weaker Yuan.

These factors may persist into the longer term of decades. As unlikely as it might seem now, lessons can be drawn from the United States dollar’s rise to world reserve currency for Bitcoin.

Ultimately, even though the US dollar took many decades, a strong industrial base, and multiple wars to make its mark - the fact that so many people from across the world demand Bitcoin and Tether peer-to-peer regardless of what border separates them presents a growing movement: on the one hand, states that must issue more and more debt and which are running away from global integration of the world economy. On the other hand, people operating in a peer-to-peer manner holding Bitcoin. In the short-term and medium-term Bitcoin and stablecoins will likely command some attention from those looking to flee domestic debt crises. In the long term, if Bitcoin commands economic gravitas the way nation-states used to give their paper money to the United States for the world’s largest gold reserves, it has a path to becoming the world’s preferred money.

Source: https://www.forbes.com/sites/digital-assets/2024/09/18/how-crushing-sovereign-debt-supports-bitcoin-price-and-stablecoins/?ss=FDA