Could Fitch’s US Credit Rating Downgrade Boost Bitcoin?

The prestigious rating agency Fitch lowered the credit rating of the US government from AAA to AA+ on August 10. An important event in the financial world that means a decrease in trust in this country and its government’s ability to efficiently manage its debts. But can this issue lead investors to buy Bitcoin as a valuable asset, causing the price of this digital currency to grow?

According to Cointelegraph, the downgrade has pushed investors into a more cautious stance, prompting many to pull their money out of assets such as stocks, silver, oil and long-term bonds. In this situation, they prefer moving towards cash and short-term bonds; Because they are considered safer options in economic instability.

As the chart above shows, market reaction to Fitch’s decision to downgrade the US government’s credit rating was broad, affecting commodities, fixed income, bonds and equities alike. This issue will have implications for various financial institutions and investment portfolios, including Bitcoin.

Some traders are now wondering whether bitcoin’s rarity and resistance to censorship could provide a safe haven from the broader “flight to safety” movement triggered by a worsening US credit rating. Flight to safety is a phenomenon in financial markets and occurs when investors sell their high-risk assets and move to safer investments such as gold.

The downgrade had little effect on the markets

A report by Moody’s Analytics in May pointed to a potential domino effect in which a downgrade of US Treasury debt could lead to further downgrades in the financial sector. It is worth noting that only Fitch and S&P have rated the US credit rating at AA+, Moody’s Analytics has maintained the index’s rating at AAA level with a stable outlook.

Interestingly, the cost of insuring U.S. government debt against default, as defined in the “credit default insurance” documents, has remained largely constant after the downgrade. An issue that is surprising in its stability in the face of such news.

This financial instrument (credit default insurance) is like an insurance policy to protect against the risk of debt default, where investors pay a premium to receive compensation if the counterparty (in this case, the US government) defaults.

This stability shows that investors are not worried about the immediate impact of the downgrade. One potential reason is that US Treasuries are considered one of the safest investments globally; Because they have the support of the government of this country. The bond issuer (borrower) guarantees to repay the debt with interest at the specified maturity.

Keep in mind that daily yield fluctuations are less important given the steady increase in 5-year government bond yields over the past 2 weeks. This could be linked to reduced investor confidence in US debt management and increased demand for higher yields.

Apart from volatility in Treasury yields, a decline in the US dollar index (DXY), which measures the value of the US dollar against other currencies, could be troublesome. If this leads to less confidence in traditional assets, investors will likely turn to alternative assets, potentially increasing the appeal of Bitcoin.

During the last 2 weeks, the US dollar index has increased from 99.5 to 102.6, which will mean a possible change in investors’ inclinations. They may be pulling their money out of Treasuries, stocks and commodities and into cash, which could highlight the dollar’s appeal in times of economic instability.

Downward outlook for Bitcoin price in the short term

The stability of credit default insurance costs for Treasuries and the strengthening of the US dollar indicate that investors are likely to increase their cash holdings in anticipation of market turmoil.

As a result, after the downgrade of the US credit rating, we will probably not see the price of Bitcoin grow in the near term. Investors’ initial drive to raise liquidity during market turmoil often leads them to overlook the benefits of decentralized assets.

Finally, given Bitcoin’s fixed supply and scarcity, the digital currency’s role as a valuable asset will be highlighted amid rising government debt that could erode the value of cash. As a result, investors may increasingly view Bitcoin as a safe haven and a powerful asset class that is also resistant to censorship due to its decentralized nature.