Is America's $40 Trillion Debt Load Bullish or Bearish For Bitcoin? The Answer Might Surprise You.

Many crypto investors see opportunity in rising U.S. national debt. The so-called debasement trade idea suggests that stable assets will outperform if the government allows inflation to run high. More debt means more money in circulation, right? So the dollar weakens, boosting the value of inflation hedges such as gold, bonds, real estate, and Bitcoin (CRYPTO: BTC). That's the popular theory.

This thesis is being tested in the real world. The national debt hit $40 trillion in August, up from $36 trillion a year earlier and $19 trillion a decade ago. It took less than five months to climb the last trillion.

Bitcoin rallied roughly 23% in late August, climbing from the low $60,000s into the high $70,000s. That was the sharpest three-day move since 2023. Gold rose alongside it. The dollar slipped. Headlines followed the Bitcoin price rush, and the conclusion was nearly unanimous: Unsustainable sovereign debt is bullish for a currency with a hard cap of 21 million coins.

Digital gold was earning its keep as an inflation hedge.

That story is extremely satisfying, but the evidence for it is actually pretty thin.

Start with the correlation stat everybody quoted

The 90-day correlation between Bitcoin and gold hit a multi-year high in early September at just over 0.5. This metric was widely shared as proof that the two assets have merged into one big safe haven.

A correlation just above 0.5 is a weak-to-moderate statistical relationship, though. The two data groups tend to move together, but not always and not at the same speed. If Bitcoin was genuinely functioning as digital gold, a multi-year peak correlation of 0.5 would be an embarrassing result, not a victory lap in the making.

Bitcoin behaves like a risk asset when it matters most

The whole debasement pitch rests on Bitcoin holding steady while everything else falls apart. Bitcoin has had a few opportunities to demonstrate this lately. It has not taken them.

During the COVID-19 crash in March 2020, it sold off more sharply than stocks. It did the same in the inflation crunch of 2022. When the financial system needs cash right away, Bitcoin is one of the first things people sell.

So Bitcoin is only loosely correlated to gold prices. Over the last year, it has instead tightened its statistical relationship with the volatile Nasdaq Composite (NASDAQINDEX: ^IXIC) stock market index.

A serious debt crisis is a liquidity event at heart. So the exact scenario Bitcoin is supposedly insuring against is also where it has historically face-planted.

Image source: Getty Images.

The real yield problem

Picture how a debt crisis actually unfolds. Bond investors get nervous, they demand more compensation, and real yields climb. That domino falls long before anything shows up at the grocery store.

Now ask what a fat real yield does to the Bitcoin pitch. A Treasury note paying a decent return after inflation, with zero chance of a 40% haircut while you're not looking, starts to seem awfully reasonable next to a risky digital asset. Bitcoin pays no dividends, you can't even stake it to earn a yield, and the price swings like a barn door in a Florida thunderstorm. The debasement trade gets least attractive right when the fiscal news gets scariest.

So the surprising answer is that $40 trillion is neither bullish nor bearish for Bitcoin. The debt number is doing almost no work for the cryptocurrency. Liquidity and real yields were driving the Bitcoin rally in August. The debt milestone just showed up late and took credit.

Anders Bylund has positions in Bitcoin. The Motley Fool has positions in and recommends Bitcoin. The Motley Fool has a disclosure policy.